Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see PAX Global Technology Limited (HKG:327) is about to trade ex-dividend in the next three days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase PAX Global Technology's shares on or after the 26th of August will not receive the dividend, which will be paid on the 16th of September.

The company's upcoming dividend is HK$0.17 a share, following on from the last 12 months, when the company distributed a total of HK$0.34 per share to shareholders. Based on the last year's worth of payments, PAX Global Technology has a trailing yield of 4.3% on the current stock price of HK$7.87. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for PAX Global Technology

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 PAX Global Technology paying out a modest 27% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out an unsustainably high 236% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

PAX Global Technology 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.

PAX Global Technology paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were PAX Global Technology to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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 fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see PAX Global Technology's earnings per share have risen 17% 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. In the last seven years, PAX Global Technology has lifted its dividend by approximately 36% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

To Sum It Up

Is PAX Global Technology an attractive dividend stock, or better left on the shelf? We like that PAX Global Technology has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. Overall, it's hard to get excited about PAX Global Technology from a dividend perspective.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. To that end, you should learn about the 2 warning signs we've spotted with PAX Global Technology (including 1 which is potentially serious).

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.