Readers hoping to buy Chongqing Machinery & Electric Co., Ltd. (HKG:2722) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Chongqing Machinery & Electric's shares before the 27th of June in order to be eligible for the dividend, which will be paid on the 28th of July.

The company's next dividend payment will be CN¥0.03 per share, and in the last 12 months, the company paid a total of CN¥0.03 per share. Looking at the last 12 months of distributions, Chongqing Machinery & Electric has a trailing yield of approximately 4.9% on its current stock price of HK$0.72. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Chongqing Machinery & Electric

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. Chongqing Machinery & Electric paid out a comfortable 37% of its profit last year. A useful secondary check can be to evaluate whether Chongqing Machinery & Electric generated enough free cash flow to afford its dividend. Dividends consumed 63% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit Chongqing Machinery & Electric paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Chongqing Machinery & Electric's earnings per share have dropped 7.6% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Chongqing Machinery & Electric has seen its dividend decline 6.7% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Has Chongqing Machinery & Electric got what it takes to maintain its dividend payments? Earnings per share have fallen significantly, although at least Chongqing Machinery & Electric paid out less than half of its profits and free cash flow over the last year, leaving some margin of safety. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

With that being said, if dividends aren't your biggest concern with Chongqing Machinery & Electric, you should know about the other risks facing this business. Our analysis shows 4 warning signs for Chongqing Machinery & Electric that we strongly recommend you have a look at before investing in the company.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.