Australian Foundation Investment Company Limited (ASX:AFI) has announced that it will be increasing its periodic dividend on the 30th of August to A$0.145, which will be 3.6% higher than last year's comparable payment amount of A$0.14. The payment will take the dividend yield to 3.5%, which is in line with the average for the industry.

See our latest analysis for Australian Foundation Investment

Australian Foundation Investment Is Paying Out More Than It Is Earning

We aren't too impressed by dividend yields unless they can be sustained over time. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.

EPS is set to fall by 7.0% over the next 12 months if recent trends continue. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 119%, which could put the dividend under pressure if earnings don't start to improve. historic-dividend

Australian Foundation Investment Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2014, the dividend has gone from A$0.22 total annually to A$0.26. This means that it has been growing its distributions at 1.7% per annum over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

Dividend Growth Is Doubtful

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. However, things aren't all that rosy. Australian Foundation Investment has seen earnings per share falling at 7.0% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth.

The Dividend Could Prove To Be Unreliable

In summary, while it's always good to see the dividend being raised, we don't think Australian Foundation Investment's payments are rock solid. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 1 warning sign for Australian Foundation Investment that investors should take into consideration. Is Australian Foundation Investment not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.



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