Redde Northgate (LON:REDD) Is Increasing Its Dividend To UK£0.15

Redde Northgate plc (LON:REDD) has announced that it will be increasing its dividend on the 30th of September to UK£0.15. This will take the dividend yield from 4.5% to 6.1%, providing a nice boost to shareholder returns.

Check out our latest analysis for Redde Northgate

Redde Northgate's Earnings Easily Cover the Distributions

If the payments aren't sustainable, a high yield for a few years won't matter that much. Based on the last payment, Redde Northgate was quite comfortably earning enough to cover the dividend. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.

Looking forward, earnings per share is forecast to rise by 0.05% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 49%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from UK£0.03 in 2012 to the most recent annual payment of UK£0.15. This works out to be a compound annual growth rate (CAGR) of approximately 18% a year over that time. Redde Northgate has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend's Growth Prospects Are Limited

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. However, Redde Northgate's EPS was effectively flat over the past five years, which could stop the company from paying more every year.

Our Thoughts On Redde Northgate's Dividend

Overall, we always like to see the dividend being raised, but we don't think Redde Northgate 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. 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 4 warning signs for Redde Northgate (of which 1 doesn't sit too well with us!) you should know about. Is Redde Northgate not quite the opportunity you were looking for? Why not check out our selection of top 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.