Zhongzhi Pharmaceutical Holdings Limited (HKG:3737) is about to trade ex-dividend in the next 2 days. If you purchase the stock on or after the 21st of May, you won't be eligible to receive this dividend, when it is paid on the 10th of June.

Zhongzhi Pharmaceutical Holdings's next dividend payment will be HK$0.043 per share, on the back of last year when the company paid a total of HK$0.081 to shareholders. Calculating the last year's worth of payments shows that Zhongzhi Pharmaceutical Holdings has a trailing yield of 7.5% on the current share price of HK$1.19. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Zhongzhi Pharmaceutical Holdings

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fortunately Zhongzhi Pharmaceutical Holdings's payout ratio is modest, at just 39% of profit. 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 37% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that Zhongzhi Pharmaceutical Holdings's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit Zhongzhi Pharmaceutical Holdings paid out over the last 12 months.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that Zhongzhi Pharmaceutical Holdings's earnings are effectively flat 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. In the last four years, Zhongzhi Pharmaceutical Holdings has lifted its dividend by approximately 29% a year on average.