Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Al Hammadi Holding Company (TADAWUL:4007) is about to trade ex-dividend in the next three days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Al Hammadi Holding's shares before the 17th of August in order to be eligible for the dividend, which will be paid on the 27th of August.

The company's next dividend payment will be ر.س0.27 per share, on the back of last year when the company paid a total of ر.س0.80 to shareholders. Calculating the last year's worth of payments shows that Al Hammadi Holding has a trailing yield of 3.2% on the current share price of ر.س25.16. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Al Hammadi Holding has been able to grow its dividends, or if the dividend might be cut.

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. Al Hammadi Holding paid out 59% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Al Hammadi Holding generated enough free cash flow to afford its dividend. It paid out an unsustainably high 278% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

While Al Hammadi Holding'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 Al Hammadi Holding 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?

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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Al Hammadi Holding's earnings have been skyrocketing, up 29% per annum for the past five years. Earnings have been growing quickly, 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. Al Hammadi Holding has delivered an average of 3.6% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

The Bottom Line

Is Al Hammadi Holding an attractive dividend stock, or better left on the shelf? It's good to see that earnings per share are growing and that the company's payout ratio is within a normal range for most businesses. However we're somewhat concerned that it paid out 278% of its cashflow, which is uncomfortably high. In summary, it's hard to get excited about Al Hammadi Holding from a dividend perspective.

With that being said, if dividends aren't your biggest concern with Al Hammadi Holding, you should know about the other risks facing this business.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.