Should You Buy Chen Hsong Holdings Limited (HKG:57) 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 Chen Hsong Holdings Limited (HKG:57) is about to go ex-dividend in just three days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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 Chen Hsong Holdings' shares on or after the 13th of December will not receive the dividend, which will be paid on the 14th of January.

The company's upcoming dividend is HK$0.038 a share, following on from the last 12 months, when the company distributed a total of HK$0.08 per share to shareholders. Based on the last year's worth of payments, Chen Hsong Holdings has a trailing yield of 5.5% on the current stock price of HK$1.45. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Chen Hsong Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Chen Hsong Holdings's payout ratio is modest, at just 48% of profit. A useful secondary check can be to evaluate whether Chen Hsong Holdings generated enough free cash flow to afford its dividend. It paid out 24% of its free cash flow as dividends last year, which is conservatively low.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit Chen Hsong Holdings 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 Chen Hsong Holdings earnings per share are up 5.1% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and 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, 10 years ago, Chen Hsong Holdings has lifted its dividend by approximately 1.3% a year on average.

Final Takeaway

Is Chen Hsong Holdings worth buying for its dividend? Earnings per share growth has been growing somewhat, and Chen Hsong Holdings is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. 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 Chen Hsong Holdings is halfway there. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while Chen Hsong Holdings has an appealing dividend, it's worth knowing the risks involved with this stock. We've identified 2 warning signs with Chen Hsong Holdings (at least 1 which can't be ignored), and understanding these should be part of your investment process.

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.