M&G Credit Income Investment Trust (LON:MGCI) Will Pay A Smaller Dividend Than Last Year

The board of M&G Credit Income Investment Trust plc (LON:MGCI) has announced it will be reducing its dividend by 8.8% from last year's payment of £0.0215 on the 27th of May, with shareholders receiving £0.0196. However, the dividend yield of 8.9% is still a decent boost to shareholder returns.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Estimates Indicate M&G Credit Income Investment Trust's Could Struggle to Maintain Dividend Payments In The Future

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.

Over the next year, EPS could expand by 12.3% if the company continues along the path it has been on recently. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 138% over the next year.

View our latest analysis for M&G Credit Income Investment Trust

M&G Credit Income Investment Trust's Dividend Has Lacked Consistency

It's comforting to see that M&G Credit Income Investment Trust has been paying a dividend for a number of years now, however it has been cut at least once in that time. This makes us cautious about the consistency of the dividend over a full economic cycle. The annual payment during the last 6 years was £0.0209 in 2019, and the most recent fiscal year payment was £0.0853. This implies that the company grew its distributions at a yearly rate of about 26% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

M&G Credit Income Investment Trust Might Find It Hard To Grow Its Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. M&G Credit Income Investment Trust has impressed us by growing EPS at 12% per year over the past five years. However, the payout ratio is very high, not leaving much room for growth of the dividend in the future.

We should note that M&G Credit Income Investment Trust has issued stock equal to 14% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

M&G Credit Income Investment Trust's Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. Strong earnings growth means M&G Credit Income Investment Trust has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. 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 M&G Credit Income Investment Trust that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.