Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Shanghai Industrial Holdings Limited (HKG:363) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase Shanghai Industrial Holdings' shares before the 7th of June to receive the dividend, which will be paid on the 24th of June.

The company's upcoming dividend is HK$0.54 a share, following on from the last 12 months, when the company distributed a total of HK$1.02 per share to shareholders. Based on the last year's worth of payments, Shanghai Industrial Holdings stock has a trailing yield of around 8.3% on the current share price of HK$12.24. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Shanghai Industrial Holdings

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. That's why it's good to see Shanghai Industrial Holdings paying out a modest 30% of its earnings. A useful secondary check can be to evaluate whether Shanghai Industrial Holdings generated enough free cash flow to afford its dividend. Luckily it paid out just 13% of its free cash flow last year.

It's positive to see that Shanghai Industrial Holdings's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Shanghai Industrial Holdings, with earnings per share up 5.1% on average over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Shanghai Industrial Holdings's dividend payments per share have declined at 0.6% per year on average over the past 10 years, which is uninspiring.

To Sum It Up

Is Shanghai Industrial Holdings an attractive dividend stock, or better left on the shelf? Earnings per share growth has been growing somewhat, and Shanghai Industrial Holdings is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Shanghai Industrial Holdings is being conservative with its dividend payouts and could still perform reasonably over the long run. Shanghai Industrial Holdings looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Shanghai Industrial Holdings for the dividends alone, you should always be mindful of the risks involved. For example - Shanghai Industrial Holdings has 1 warning sign we think you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.