Dividend Investors: Don't Be Too Quick To Buy Thunder Software Technology Co.,Ltd. (SZSE:300496) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Thunder Software Technology Co.,Ltd. (SZSE:300496) is about to go ex-dividend in just four 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 important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Thunder Software TechnologyLtd's shares before the 24th of September in order to receive the dividend, which the company will pay on the 24th of September.

The company's upcoming dividend is CN¥0.125 a share, following on from the last 12 months, when the company distributed a total of CN¥0.25 per share to shareholders. Based on the last year's worth of payments, Thunder Software TechnologyLtd stock has a trailing yield of around 0.8% on the current share price of CN¥33.13. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Thunder Software TechnologyLtd has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Thunder Software TechnologyLtd

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, Thunder Software TechnologyLtd paid out 94% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 178% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Thunder Software TechnologyLtd does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

As Thunder Software TechnologyLtd's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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 fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about Thunder Software TechnologyLtd's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past eight years, Thunder Software TechnologyLtd has increased its dividend at approximately 8.7% a year on average.

To Sum It Up

Should investors buy Thunder Software TechnologyLtd for the upcoming dividend? Not only are earnings per share flat, but Thunder Software TechnologyLtd is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in Thunder Software TechnologyLtd and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 3 warning signs for Thunder Software TechnologyLtd that we recommend you consider before investing in the business.

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.