Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Digital China Information Service Company Ltd. (SZSE:000555) is about to go ex-dividend in just 3 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 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. In other words, investors can purchase Digital China Information Service's shares before the 13th of June in order to be eligible for the dividend, which will be paid on the 13th of June.

The company's next dividend payment will be CN¥0.04 per share. Last year, in total, the company distributed CN¥0.04 to shareholders. Looking at the last 12 months of distributions, Digital China Information Service has a trailing yield of approximately 0.4% on its current stock price of CN¥11.02. If you buy this business for its dividend, you should have an idea of whether Digital China Information Service's dividend is reliable and sustainable. So we need to investigate whether Digital China Information Service can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Digital China Information Service

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Digital China Information Service paid out just 11% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. Thankfully its dividend payments took up just 41% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that Digital China Information Service'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 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. With that in mind, we're encouraged by the steady growth at Digital China Information Service, with earnings per share up 7.5% on average over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.

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, seven years ago, Digital China Information Service has lifted its dividend by approximately 4.2% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Is Digital China Information Service an attractive dividend stock, or better left on the shelf? Earnings per share growth has been growing somewhat, and Digital China Information Service is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Digital China Information Service is being conservative with its dividend payouts and could still perform reasonably over the long run. Digital China Information Service looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Digital China Information Service for the dividends alone, you should always be mindful of the risks involved. Case in point: We've spotted 1 warning sign for Digital China Information Service 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.