The board of Australian Foundation Investment Company Limited (ASX:AFI) has announced that it will pay a dividend of A$0.115 per share on the 26th of February. The payment will take the dividend yield to 3.3%, which is in line with the average for the industry.

Check out our latest analysis for Australian Foundation Investment

Australian Foundation Investment Doesn't Earn Enough To Cover Its Payments

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, the company was paying out 107% of what it was earning. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.

If the company can't turn things around, EPS could fall by 5.9% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 115%, which could put the dividend under pressure if earnings don't start to improve. historic-dividend

Australian Foundation Investment Has A Solid Track Record

The company has an extended history of paying stable dividends. The dividend has gone from an annual total of A$0.22 in 2014 to the most recent total annual payment of A$0.25. This works out to be a compound annual growth rate (CAGR) of approximately 1.3% a year over that time. Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think makes this a fairly attractive offer.

Dividend Growth May Be Hard To Come By

Investors could be attracted to the stock based on the quality of its payment history. Unfortunately things aren't as good as they seem. It's not great to see that Australian Foundation Investment's earnings per share has fallen at approximately 5.9% 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.



The Dividend Could Prove To Be Unreliable

Overall, we always like to see the dividend being raised, but we don't think Australian Foundation Investment will make a great income stock. Although they have been consistent in the past, we think the payments are a little high to be sustained. This company is not in the top tier of income providing stocks.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs for Australian Foundation Investment 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.

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