Readers hoping to buy Lung Kee (Bermuda) Holdings Limited (HKG:255) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Lung Kee (Bermuda) Holdings' shares before the 6th of June in order to be eligible for the dividend, which will be paid on the 21st of June.

The company's next dividend payment will be HK$0.20 per share, on the back of last year when the company paid a total of HK$0.35 to shareholders. Based on the last year's worth of payments, Lung Kee (Bermuda) Holdings has a trailing yield of 9.4% on the current stock price of HK$3.71. 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 Lung Kee (Bermuda) Holdings has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Lung Kee (Bermuda) Holdings

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. Last year Lung Kee (Bermuda) Holdings paid out 97% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Lung Kee (Bermuda) Holdings paid out more free cash flow than it generated - 137%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Lung Kee (Bermuda) 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 Lung Kee (Bermuda) 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 Lung Kee (Bermuda) Holdings 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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Lung Kee (Bermuda) Holdings, with earnings per share up 3.5% on average over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that Lung Kee (Bermuda) Holdings is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Lung Kee (Bermuda) Holdings has increased its dividend at approximately 1.2% a year on average.

Final Takeaway

Is Lung Kee (Bermuda) Holdings worth buying for its dividend? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in Lung Kee (Bermuda) Holdings despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Case in point: We've spotted 2 warning signs for Lung Kee (Bermuda) Holdings you should be aware of.

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.