Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see EVA Precision Industrial Holdings Limited (HKG:838) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase EVA Precision Industrial Holdings' shares before the 8th of September to receive the dividend, which will be paid on the 25th of September.

The company's upcoming dividend is HK$0.021 a share, following on from the last 12 months, when the company distributed a total of HK$0.042 per share to shareholders. Based on the last year's worth of payments, EVA Precision Industrial Holdings has a trailing yield of 6.2% on the current stock price of HK$0.68. If you buy this business for its dividend, you should have an idea of whether EVA Precision Industrial Holdings's dividend is reliable and sustainable. So we need to investigate whether EVA Precision Industrial Holdings can afford its dividend, and if the dividend could grow.

Check out our latest analysis for EVA Precision Industrial Holdings

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. EVA Precision Industrial Holdings paid out a comfortable 30% of its profit last year. A useful secondary check can be to evaluate whether EVA Precision Industrial Holdings generated enough free cash flow to afford its dividend. It paid out an unsustainably high 214% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how EVA Precision Industrial Holdings intends to continue funding this dividend, or if it could be forced to cut the payment.

While EVA Precision Industrial Holdings's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to EVA Precision Industrial Holdings's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see EVA Precision Industrial Holdings's earnings per share have risen 12% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. EVA Precision Industrial Holdings has delivered 14% dividend growth per year on average over the past 10 years. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

The Bottom Line

Has EVA Precision Industrial Holdings got what it takes to maintain its dividend payments? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

On that note, you'll want to research what risks EVA Precision Industrial Holdings is facing. In terms of investment risks, we've identified 1 warning sign with EVA Precision Industrial Holdings and understanding them should be part of your investment process.

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.