Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Guangdong Investment Limited (HKG:270) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 3rd of October, you won't be eligible to receive this dividend, when it is paid on the 24th of October.

Guangdong Investment's next dividend payment will be HK$0.2 per share, on the back of last year when the company paid a total of HK$0.5 to shareholders. Based on the last year's worth of payments, Guangdong Investment stock has a trailing yield of around 3.5% on the current share price of HK$15.46. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Guangdong Investment has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Guangdong Investment

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. Guangdong Investment paid out more than half (71%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year it paid out 58% of its free cash flow as dividends, within the usual range for most companies.

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 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that Guangdong Investment's earnings are effectively flat 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. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Guangdong Investment has delivered an average of 18% per year annual increase in its dividend, based on the past ten years of dividend payments.

The Bottom Line

Has Guangdong Investment got what it takes to maintain its dividend payments? Earnings per share have barely grown, and although Guangdong Investment paid out over half its earnings and free cash flow last year, the payout ratios are within a normal range for most companies. All things considered, we are not particularly enthused about Guangdong Investment from a dividend perspective.

Wondering what the future holds for Guangdong Investment? See what the 11 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.