Readers hoping to buy SEC Electric Machinery Co., Ltd. (SHSE:603988) 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase SEC Electric Machinery's shares on or after the 8th of May will not receive the dividend, which will be paid on the 8th of May.

The company's next dividend payment will be CN¥0.06 per share. Last year, in total, the company distributed CN¥0.06 to shareholders. Based on the last year's worth of payments, SEC Electric Machinery has a trailing yield of 0.6% on the current stock price of CN¥9.70. If you buy this business for its dividend, you should have an idea of whether SEC Electric Machinery's dividend is reliable and sustainable. As a result, readers should always check whether SEC Electric Machinery has been able to grow its dividends, or if the dividend might be cut.

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. SEC Electric Machinery paid out a comfortable 33% of its profit last year. 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. Thankfully its dividend payments took up just 44% of the free cash flow it generated, which is a comfortable payout ratio.

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 SEC Electric Machinery paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. 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's why it's not ideal to see SEC Electric Machinery's earnings per share have been shrinking at 2.6% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. SEC Electric Machinery has seen its dividend decline 1.4% per annum on average over the past nine years, which is not great to see.

Final Takeaway

From a dividend perspective, should investors buy or avoid SEC Electric Machinery? Earnings per share are down meaningfully, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It's definitely not great to see earnings falling, but at least there may be some buffer before the dividend needs to be cut. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

While it's tempting to invest in SEC Electric Machinery for the dividends alone, you should always be mindful of the risks involved. For instance, we've identified 3 warning signs for SEC Electric Machinery (2 are concerning) you should be aware of.

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.