Duxton Water (ASX:D2O) Has Announced That It Will Be Increasing Its Dividend To A$0.037

Duxton Water Limited (ASX:D2O) has announced that it will be increasing its periodic dividend on the 25th of October to A$0.037, which will be 5.7% higher than last year's comparable payment amount of A$0.035. This makes the dividend yield 5.4%, which is above the industry average.

Check out our latest analysis for Duxton Water

Duxton Water Is Paying Out More Than It Is Earning

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, the dividend made up 148% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.

The next 12 months is set to see EPS grow by 5.5%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 97%, which probably can't continue without putting some pressure on the balance sheet.

Duxton Water Is Still Building Its Track Record

Duxton Water's dividend has been pretty stable for a little while now, but we will continue to be cautious until it has been demonstrated for a few more years. Since 2017, the annual payment back then was A$0.023, compared to the most recent full-year payment of A$0.072. This implies that the company grew its distributions at a yearly rate of about 18% over that duration. Duxton Water has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

The Dividend's Growth Prospects Are Limited

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Unfortunately things aren't as good as they seem. Unfortunately, Duxton Water's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year.

We're Not Big Fans Of Duxton Water's Dividend

In conclusion, we have some concerns about this dividend, even though it being raised is good. The company's earnings aren't high enough to be making such big distributions, and it isn't backed up by strong growth or consistency either. We don't think that this is a great candidate to be an income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for Duxton Water (of which 2 shouldn't be ignored!) you should know about. Is Duxton Water not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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