Dividend paying stocks like Wuxi Sunlit Science and Technology Company Limited (HKG:1289) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, Wuxi Sunlit Science and Technology likely looks attractive to dividend investors, given its 5.2% dividend yield and five-year payment history. We'd agree the yield does look enticing. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Explore this interactive chart for our latest analysis on Wuxi Sunlit Science and Technology!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, Wuxi Sunlit Science and Technology paid out 81% of its profit as dividends. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. The company paid out 85% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn. 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.

While the above analysis focuses on dividends relative to a company's earnings, we do note Wuxi Sunlit Science and Technology's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on Wuxi Sunlit Science and Technology's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Wuxi Sunlit Science and Technology has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.15 in 2015, compared to CN¥0.05 last year. This works out to a decline of approximately 67% over that time.