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

Australian Foundation Investment Company Limited (ASX:AFI) has announced that it will pay a dividend of A$0.14 per share on the 1st of September. Including this payment, the dividend yield on the stock will be 3.5%, which is a modest boost for shareholders' returns.

View our latest analysis for Australian Foundation Investment

Australian Foundation Investment Doesn't Earn Enough To Cover Its Payments

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Before making this announcement, the company's dividend was much higher than its earnings. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.

Earnings per share could rise by 1.2% over the next year if things go the same way as they have for the last few years. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 100% over the next year.

Australian Foundation Investment Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2013, the annual payment back then was A$0.22, compared to the most recent full-year payment of A$0.25. This works out to be a compound annual growth rate (CAGR) of approximately 1.3% a year 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 May Be Hard To Achieve

Investors could be attracted to the stock based on the quality of its payment history. However, Australian Foundation Investment's EPS was effectively flat over the past five years, which could stop the company from paying more every year. The company is paying out a lot of its profits, even though it is growing those profits pretty slowly. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.

Australian Foundation Investment's Dividend Doesn't Look Sustainable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. 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. We don't think Australian Foundation Investment is a great stock to add to your portfolio if income is your focus.

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 2 warning signs for Australian Foundation Investment that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield 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.