Readers hoping to buy Raymond Industrial Limited (HKG:229) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 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 Raymond Industrial's shares on or after the 14th of September will not receive the dividend, which will be paid on the 5th of October.

The company's next dividend payment will be HK$0.03 per share. Last year, in total, the company distributed HK$0.06 to shareholders. Calculating the last year's worth of payments shows that Raymond Industrial has a trailing yield of 7.1% on the current share price of HK$0.84. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Raymond Industrial can afford its dividend, and if the dividend could grow.

View our latest analysis for Raymond Industrial

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. Raymond Industrial paid out 74% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Raymond Industrial generated enough free cash flow to afford its dividend. It distributed 26% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Raymond Industrial'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 Raymond Industrial 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 earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Raymond Industrial earnings per share are up 4.7% per annum over the last five years. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Raymond Industrial's dividend payments per share have declined at 1.5% per year on average over the past 10 years, which is uninspiring.

The Bottom Line

Is Raymond Industrial an attractive dividend stock, or better left on the shelf? Earnings per share growth has been modest and Raymond Industrial paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. To summarise, Raymond Industrial looks okay on this analysis, although it doesn't appear a stand-out opportunity.

In light of that, while Raymond Industrial has an appealing dividend, it's worth knowing the risks involved with this stock. To that end, you should learn about the 2 warning signs we've spotted with Raymond Industrial (including 1 which is concerning).

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.