Do These 3 Checks Before Buying Shenzhen Fuanna Bedding and Furnishing Co.,Ltd (SZSE:002327) For Its Upcoming Dividend

Readers hoping to buy Shenzhen Fuanna Bedding and Furnishing Co.,Ltd (SZSE:002327) 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 the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Therefore, if you purchase Shenzhen Fuanna Bedding and FurnishingLtd's shares on or after the 19th of June, you won't be eligible to receive the dividend, when it is paid on the 19th of June.

The company's upcoming dividend is CN¥0.65 a share, following on from the last 12 months, when the company distributed a total of CN¥0.65 per share to shareholders. Looking at the last 12 months of distributions, Shenzhen Fuanna Bedding and FurnishingLtd has a trailing yield of approximately 5.9% on its current stock price of CN¥11.05. 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! So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Shenzhen Fuanna Bedding and FurnishingLtd

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. Last year Shenzhen Fuanna Bedding and FurnishingLtd paid out 93% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. It paid out 78% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's good to see that while Shenzhen Fuanna Bedding and FurnishingLtd's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Shenzhen Fuanna Bedding and FurnishingLtd's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Shenzhen Fuanna Bedding and FurnishingLtd has delivered an average of 33% per year annual increase in its dividend, based on the past 10 years of dividend payments.

To Sum It Up

Should investors buy Shenzhen Fuanna Bedding and FurnishingLtd for the upcoming dividend? Flat earnings per share and a high payout ratio are not what we like to see, although at least it paid out a lower percentage of its free cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Shenzhen Fuanna Bedding and FurnishingLtd don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 1 warning sign for Shenzhen Fuanna Bedding and FurnishingLtd and you should be aware of this before buying any shares.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com