Solution Dynamics (NZSE:SDL) Is Due To Pay A Dividend Of NZ$0.04

The board of Solution Dynamics Limited (NZSE:SDL) has announced that it will pay a dividend on the 30th of September, with investors receiving NZ$0.04 per share. This makes the dividend yield 5.1%, which will augment investor returns quite nicely.

Check out our latest analysis for Solution Dynamics

Solution Dynamics' Dividend Is Well Covered By Earnings

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Solution Dynamics' dividend made up quite a large proportion of earnings but only 68% of free cash flows. This leaves plenty of cash for reinvestment into the business.

Over the next year, EPS could expand by 13.3% if the company continues along the path it has been on recently. If recent patterns in the dividend continue, the payout ratio in 12 months could be 77% which is a bit high but can definitely be sustainable.

Solution Dynamics' Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2015, the dividend has gone from NZ$0.015 total annually to NZ$0.13. This works out to be a compound annual growth rate (CAGR) of approximately 36% a year over that time. 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.

The Dividend Looks Likely To Grow

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see that Solution Dynamics has been growing its earnings per share at 13% a year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.

We Really Like Solution Dynamics' Dividend

Overall, we think that this is a great income investment, and we think that maintaining the dividend this year may have been a conservative choice. Earnings are easily covering distributions, and the company is generating plenty of cash. Taking this all into consideration, this looks like it could be a good dividend opportunity.

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 2 warning signs for Solution Dynamics that investors need to be conscious of moving forward. Is Solution Dynamics 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.