Readers hoping to buy CLP Holdings Limited (HKG:2) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 6th of March, you won't be eligible to receive this dividend, when it is paid on the 19th of March.

CLP Holdings's upcoming dividend is HK$1.19 a share, following on from the last 12 months, when the company distributed a total of HK$3.08 per share to shareholders. Calculating the last year's worth of payments shows that CLP Holdings has a trailing yield of 3.8% on the current share price of HK$81.8. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for CLP 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. CLP Holdings distributed an unsustainably high 167% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. CLP Holdings's earnings per share have fallen at approximately 16% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past ten years, CLP Holdings has increased its dividend at approximately 2.2% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. CLP Holdings is already paying out 167% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Is CLP Holdings worth buying for its dividend? Earnings per share are in decline and CLP Holdings is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. CLP Holdings doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the dividend.