Australian Foundation Investment's (ASX:AFI) Upcoming Dividend Will Be Larger Than Last Year's

Australian Foundation Investment Company Limited (ASX:AFI) will increase its dividend on the 30th of August to A$0.145, which is 3.6% higher than last year's payment from the same period of A$0.14. This takes the annual payment to 3.5% of the current stock price, which is about average for the industry.

View our latest analysis for Australian Foundation Investment

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

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Before making this announcement, the company's dividend was much higher than its earnings. It will be difficult to sustain this level of payout so we wouldn't be confident about this continuing.

EPS is set to fall by 7.0% over the next 12 months if recent trends continue. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 119%, which is definitely a bit high to be sustainable going forward.

Australian Foundation Investment Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2014, the annual payment back then was A$0.22, compared to the most recent full-year payment of A$0.26. This implies that the company grew its distributions at a yearly rate of about 1.7% over that duration. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

Dividend Growth May Be Hard To Come By

Investors could be attracted to the stock based on the quality of its payment history. Unfortunately things aren't as good as they seem. Australian Foundation Investment has seen earnings per share falling at 7.0% per year over the last five years. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends.

Australian Foundation Investment's Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 1 warning sign for Australian Foundation Investment that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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