Readers hoping to buy Hong Leong Asia Ltd. (SGX:H22) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase Hong Leong Asia's shares on or after the 3rd of May, you won't be eligible to receive the dividend, when it is paid on the 15th of May.

The company's next dividend payment will be S$0.02 per share, and in the last 12 months, the company paid a total of S$0.02 per share. Last year's total dividend payments show that Hong Leong Asia has a trailing yield of 3.3% on the current share price of S$0.605. 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 investigate whether Hong Leong Asia can afford its dividend, and if the dividend could grow.

View our latest analysis for Hong Leong Asia

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. Hong Leong Asia has a low and conservative payout ratio of just 23% of its income after tax. 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. It paid out 5.7% of its free cash flow as dividends last year, which is conservatively low.

It's positive to see that Hong Leong Asia'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 Hong Leong Asia paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Hong Leong Asia earnings per share are up 9.1% per annum over the last five years. Earnings per share have been increasing steadily and management is reinvesting almost all of the profits back into the business. If profits are reinvested effectively, this could be a bullish combination for future earnings and dividends.