The board of City of London Investment Group PLC (LON:CLIG) has announced that it will pay a dividend on the 4th of November, with investors receiving £0.22 per share. Based on this payment, the dividend yield on the company's stock will be 7.8%, which is an attractive boost to shareholder returns.

Check out our latest analysis for City of London Investment Group

City of London Investment Group Doesn't Earn Enough To Cover Its Payments

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, City of London Investment Group's dividend made up quite a large proportion of earnings but only 65% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

Over the next year, EPS is forecast to fall by 12.0%. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 151%, which could put the dividend under pressure if earnings don't start to improve. historic-dividend

City of London Investment Group Has A Solid Track Record

The company has an extended history of paying stable dividends. The annual payment during the last 10 years was £0.24 in 2012, and the most recent fiscal year payment was £0.33. This implies that the company grew its distributions at a yearly rate of about 3.2% over that duration. Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think makes this a fairly attractive offer.

City of London Investment Group May Find It Hard To Grow The Dividend

The company's investors will be pleased to have been receiving dividend income for some time. However, City of London Investment Group's EPS was effectively flat over the past five years, which could stop the company from paying more every year. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company has reached maturity. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.



In Summary

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. 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 City of London Investment Group that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.

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