Australian Foundation Investment (ASX:AFI) Is Due To Pay A Dividend Of A$0.14

Australian Foundation Investment Company Limited (ASX:AFI) will pay a dividend of A$0.14 on the 30th of August. Including this payment, the dividend yield on the stock will be 3.0%, which is a modest boost for shareholders' returns.

Check out our latest analysis for Australian Foundation Investment

Australian Foundation Investment's Dividend Is Well Covered By Earnings

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. At the time of the last dividend payment, Australian Foundation Investment was paying out a very large proportion of what it was earning and 106% of cash flows. This is certainly a risk factor, as reduced cash flows could force the company to pay a lower dividend.

Earnings per share could rise by 6.6% over the next year if things go the same way as they have for the last few years. If the dividend continues along recent trends, we estimate the payout ratio could reach 77%, which is on the higher side, but certainly still feasible.

Australian Foundation Investment Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. The annual payment during the last 10 years was A$0.21 in 2012, and the most recent fiscal year payment was A$0.24. This works out to be a compound annual growth rate (CAGR) of approximately 1.3% a year over that time. 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.

We Could See Australian Foundation Investment's Dividend Growing

Investors could be attracted to the stock based on the quality of its payment history. It's encouraging to see that Australian Foundation Investment has been growing its earnings per share at 6.6% a year over the past five years. EPS has been growing at a reasonable rate, although with most of the profits being paid out to shareholders, growth prospects could be more limited in the future.

The Dividend Could Prove To Be Unreliable

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Australian Foundation Investment's payments, as there could be some issues with sustaining them into the future. Although they have been consistent in the past, we think the payments are a little high to be sustained. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 2 warning signs for Australian Foundation Investment (of which 1 is a bit concerning!) you should know about. 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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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.