Readers hoping to buy Sanxiang Advanced Materials Co., Ltd. (SHSE:603663) 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. Therefore, if you purchase Sanxiang Advanced Materials' shares on or after the 12th of July, you won't be eligible to receive the dividend, when it is paid on the 12th of July.

The company's upcoming dividend is CN¥0.10 a share, following on from the last 12 months, when the company distributed a total of CN¥0.10 per share to shareholders. Based on the last year's worth of payments, Sanxiang Advanced Materials has a trailing yield of 0.5% on the current stock price of CN¥20.87. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Sanxiang Advanced Materials has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Sanxiang Advanced Materials

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Sanxiang Advanced Materials has a low and conservative payout ratio of just 19% of its income after tax. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 54% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that Sanxiang Advanced Materials'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 how much of its profit Sanxiang Advanced Materials paid out over the last 12 months.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Sanxiang Advanced Materials's earnings per share have been growing at 15% a year for the past five years. Sanxiang Advanced Materials has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, five years ago, Sanxiang Advanced Materials has lifted its dividend by approximately 7.0% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Should investors buy Sanxiang Advanced Materials for the upcoming dividend? Earnings per share have grown at a nice rate in recent times and over the last year, Sanxiang Advanced Materials paid out less than half its earnings and a bit over half its free cash flow. Sanxiang Advanced Materials looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Sanxiang Advanced Materials for the dividends alone, you should always be mindful of the risks involved. For example, we've found 2 warning signs for Sanxiang Advanced Materials that we recommend you consider before investing in the business.

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.