Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Arriyadh Development Co. (TADAWUL:4150) is about to go ex-dividend in just 2 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 of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. This means that investors who purchase Arriyadh Development's shares on or after the 14th of May will not receive the dividend, which will be paid on the 1st of January.

The company's next dividend payment will be ر.س0.25 per share. Last year, in total, the company distributed ر.س0.50 to shareholders. Based on the last year's worth of payments, Arriyadh Development has a trailing yield of 2.7% on the current stock price of ر.س18.78. If you buy this business for its dividend, you should have an idea of whether Arriyadh Development's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Arriyadh Development paid out a comfortable 31% of its profit last year. A useful secondary check can be to evaluate whether Arriyadh Development generated enough free cash flow to afford its dividend. It paid out 105% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Arriyadh Development does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Arriyadh Development'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 Arriyadh Development to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Arriyadh Development paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that Arriyadh Development's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Earnings have been growing somewhat, 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. Arriyadh Development has seen its dividend decline 4.0% per annum on average over the past 10 years, which is not great to see.

The Bottom Line

Should investors buy Arriyadh Development for the upcoming dividend? Earnings per share have been effectively flat over this time, and Arriyadh Development's paying out less than half its profits and 105% of its cash flow. Only rarely do we find companies paying out a low percentage of their profits yet a high percentage of their cash flow, so we'd mark this as a concern. In summary, it's hard to get excited about Arriyadh Development from a dividend perspective.

With that being said, if dividends aren't your biggest concern with Arriyadh Development, you should know about the other risks facing this business. For example - Arriyadh Development has 1 warning sign we think you should be aware of.

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.