China XD Electric (SHSE:601179) Could Be A Buy For Its Upcoming Dividend

China XD Electric Co., Ltd (SHSE:601179) is about to trade ex-dividend in the next 2 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. Accordingly, China XD Electric investors that purchase the stock on or after the 23rd of January will not receive the dividend, which will be paid on the 23rd of January.

The company's next dividend payment will be CN¥0.026 per share, on the back of last year when the company paid a total of CN¥0.07 to shareholders. Based on the last year's worth of payments, China XD Electric stock has a trailing yield of around 1.0% on the current share price of CN¥7.27. If you buy this business for its dividend, you should have an idea of whether China XD Electric's dividend is reliable and sustainable. As a result, readers should always check whether China XD Electric has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for China XD Electric

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately China XD Electric's payout ratio is modest, at just 46% of profit. A useful secondary check can be to evaluate whether China XD Electric generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 14% of its cash flow last year.

It's positive to see that China XD Electric'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?

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, China XD Electric's earnings per share have been growing at 15% a year for the past five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. China XD Electric's dividend payments per share have declined at 1.3% per year on average over the past 10 years, which is uninspiring.

The Bottom Line

From a dividend perspective, should investors buy or avoid China XD Electric? It's great that China XD Electric is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. There's a lot to like about China XD Electric, and we would prioritise taking a closer look at it.

So while China XD Electric looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Case in point: We've spotted 1 warning sign for China XD Electric 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.