It looks like SITC International Holdings Company Limited (HKG:1308) is about to go ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 5th of September will not receive the dividend, which will be paid on the 20th of September.

The upcoming dividend for SITC International Holdings will put a total of US$0.18 per share in shareholders' pockets, up from last year's total dividends of US$0.052. 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 SITC International Holdings has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for SITC International Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. SITC International Holdings is paying out an acceptable 70% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether SITC International Holdings generated enough free cash flow to afford its dividend. Over the past year it paid out 134% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

While SITC International Holdings's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were SITC International Holdings to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, SITC International Holdings's earnings per share have been growing at 13% a year for the past five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 8 years ago, SITC International Holdings has lifted its dividend by approximately 18% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

From a dividend perspective, should investors buy or avoid SITC International Holdings? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note SITC International Holdings paid out a much higher percentage of its free cash flow, which makes us uncomfortable. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of SITC International Holdings's dividend merits.

Ever wonder what the future holds for SITC International Holdings? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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