Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see China Wood Optimization (Holding) Limited (HKG:1885) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 25th of May, you won't be eligible to receive this dividend, when it is paid on the 10th of June.
The upcoming dividend for China Wood Optimization (Holding) will put a total of HK$0.02 per share in shareholders' pockets, up from last year's total dividends of HK$0.018. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
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. China Wood Optimization (Holding) paid out just 25% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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 47% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that China Wood Optimization (Holding)'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.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. 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 China Wood Optimization (Holding), with earnings per share up 2.3% on average over the last five years. Recent earnings growth has been limited. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, three years ago, China Wood Optimization (Holding) has lifted its dividend by approximately 4.7% 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.
Has China Wood Optimization (Holding) got what it takes to maintain its dividend payments? Earnings per share have been growing moderately, and China Wood Optimization (Holding) is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and China Wood Optimization (Holding) is halfway there. Overall we think this is an attractive combination and worthy of further research.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. To help with this, we've discovered 1 warning sign for China Wood Optimization (Holding) that you should be aware of before investing in their shares.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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This article by Simply Wall St is general in nature. 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. Thank you for reading.