Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Avi-Tech Holdings Limited (SGX:1R6) is about to trade ex-dividend in the next three days. 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Avi-Tech Holdings' shares before the 10th of November in order to be eligible for the dividend, which will be paid on the 29th of November.

The company's next dividend payment will be S$0.01 per share. Last year, in total, the company distributed S$0.018 to shareholders. Calculating the last year's worth of payments shows that Avi-Tech Holdings has a trailing yield of 6.1% on the current share price of SGD0.285. If you buy this business for its dividend, you should have an idea of whether Avi-Tech Holdings's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Avi-Tech Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Avi-Tech Holdings paid out 95% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Avi-Tech Holdings generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 579% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Avi-Tech Holdings intends to continue funding this dividend, or if it could be forced to cut the payment.

Avi-Tech Holdings does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

As Avi-Tech Holdings's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see how much of its profit Avi-Tech Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Avi-Tech Holdings's earnings per share have fallen at approximately 15% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Avi-Tech Holdings has delivered an average of 4.8% per year annual increase in its dividend, based on the past eight years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Avi-Tech Holdings is already paying out 95% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Is Avi-Tech Holdings an attractive dividend stock, or better left on the shelf? Not only are earnings per share declining, but Avi-Tech Holdings is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. It's not that we think Avi-Tech Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Avi-Tech Holdings don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 2 warning signs for Avi-Tech Holdings (1 shouldn't be ignored!) that you ought to be aware of before buying the shares.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.