Yau Lee Holdings Limited (HKG:406) stock is about to trade ex-dividend in 4 days. 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. 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. In other words, investors can purchase Yau Lee Holdings' shares before the 19th of December in order to be eligible for the dividend, which will be paid on the 13th of January.

The company's upcoming dividend is HK$0.025 a share, following on from the last 12 months, when the company distributed a total of HK$0.05 per share to shareholders. Calculating the last year's worth of payments shows that Yau Lee Holdings has a trailing yield of 3.9% on the current share price of HK$1.27. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Yau Lee 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. Fortunately Yau Lee Holdings's payout ratio is modest, at just 49% of profit. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 37% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Yau Lee Holdings'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 how much of its profit Yau Lee Holdings paid out over the last 12 months.

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Yau Lee Holdings has grown its earnings rapidly, up 25% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Yau Lee Holdings has increased its dividend at approximately 8.2% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Is Yau Lee Holdings worth buying for its dividend? Yau Lee Holdings has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. Yau Lee Holdings looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

In light of that, while Yau Lee Holdings has an appealing dividend, it's worth knowing the risks involved with this stock. In terms of investment risks, we've identified 4 warning signs with Yau Lee Holdings and understanding them should be part of your investment process.

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.