discoverIE Group's (LON:DSCV) Upcoming Dividend Will Be Larger Than Last Year's

The board of discoverIE Group plc (LON:DSCV) has announced that it will be increasing its dividend by 4.4% on the 2nd of August to £0.0825, up from last year's comparable payment of £0.079. The payment will take the dividend yield to 1.7%, which is in line with the average for the industry.

See our latest analysis for discoverIE Group

discoverIE Group's Earnings Easily Cover The Distributions

Solid dividend yields are great, but they only really help us if the payment is sustainable. Prior to this announcement, discoverIE Group's dividend made up quite a large proportion of earnings but only 32% of free cash flows. This leaves plenty of cash for reinvestment into the business.

Looking forward, earnings per share is forecast to rise by 64.5% over the next year. If the dividend continues on this path, the payout ratio could be 47% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was £0.085 in 2014, and the most recent fiscal year payment was £0.12. This implies that the company grew its distributions at a yearly rate of about 3.5% over that duration. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

discoverIE Group May Find It Hard To Grow The Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's not great to see that discoverIE Group's earnings per share has fallen at approximately 4.2% per year over the past five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

Our Thoughts On discoverIE Group's Dividend

Overall, we always like to see the dividend being raised, but we don't think discoverIE Group will make a great income stock. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 1 warning sign for discoverIE Group that investors should take into consideration. Is discoverIE Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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