Read This Before Considering Chang Wah Electromaterials Inc. (TWSE:8070) For Its Upcoming NT$0.70 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 Chang Wah Electromaterials Inc. (TWSE:8070) is about to go ex-dividend in just three 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. Therefore, if you purchase Chang Wah Electromaterials' shares on or after the 19th of December, you won't be eligible to receive the dividend, when it is paid on the 17th of January.

The company's next dividend payment will be NT$0.70 per share, and in the last 12 months, the company paid a total of NT$2.32 per share. Based on the last year's worth of payments, Chang Wah Electromaterials has a trailing yield of 4.8% on the current stock price of NT$48.60. If you buy this business for its dividend, you should have an idea of whether Chang Wah Electromaterials's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Chang Wah Electromaterials

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. Chang Wah Electromaterials distributed an unsustainably high 115% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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 paid out 83% 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 disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Chang Wah Electromaterials fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Chang Wah Electromaterials paid out over the last 12 months.

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Chang Wah Electromaterials earnings per share are up 8.3% per annum over the last five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Chang Wah Electromaterials has increased its dividend at approximately 21% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Should investors buy Chang Wah Electromaterials for the upcoming dividend? Earnings per share have not grown all that much, and the company is paying out an uncomfortably high percentage of its income. Fortunately it paid out a lower percentage of its cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Chang Wah Electromaterials.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Chang Wah Electromaterials. For example, we've found 1 warning sign for Chang Wah Electromaterials that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.