Danaos (NYSE:DAC) Will Pay A Larger Dividend Than Last Year At $0.90

The board of Danaos Corporation (NYSE:DAC) has announced that the dividend on 11th of December will be increased to $0.90, which will be 5.9% higher than last year's payment of $0.85 which covered the same period. Despite this raise, the dividend yield of 3.7% is only a modest boost to shareholder returns.

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Danaos' Payment Could Potentially Have Solid Earnings Coverage

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Before making this announcement, Danaos was easily earning enough to cover the dividend. This means that most of its earnings are being retained to grow the business.

EPS is set to fall by 38.3% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio could be 25%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

See our latest analysis for Danaos

Danaos Doesn't Have A Long Payment History

Even though the company has been paying a consistent dividend for a while, we would like to see a few more years before we feel comfortable relying on it. The dividend has gone from an annual total of $2.00 in 2020 to the most recent total annual payment of $3.40. This works out to be a compound annual growth rate (CAGR) of approximately 11% a year over that time. Danaos 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 Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. It's encouraging to see that Danaos has been growing its earnings per share at 32% a year over the past five years. Earnings per share is growing at a solid clip, and the payout ratio is low which we think is an ideal combination in a dividend stock as the company can quite easily raise the dividend in the future.

We Really Like Danaos' Dividend

Overall, a dividend increase is always good, and we think that Danaos is a strong income stock thanks to its track record and growing earnings. The earnings easily cover the company's distributions, and the company is generating plenty of cash. If earnings do fall over the next 12 months, the dividend could be buffeted a little bit, but we don't think it should cause too much of a problem in the long term. All of these factors considered, we think this has solid potential as a dividend stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 1 warning sign for Danaos that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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