The board of Caledonia Investments plc (LON:CLDN) has announced that it will be increasing its dividend on the 4th of August to UK£2.22. This will take the annual payment from 1.7% to 6.3% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for Caledonia Investments

Caledonia Investments' Dividend Is Well Covered By Earnings

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Caledonia Investments was paying a whopping 99% as a dividend, but this only made up 5.8% of its overall earnings. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

Looking forward, earnings per share could rise by 16.4% over the next year if the trend from the last few years continues. If the dividend continues on this path, the payout ratio could be 19% by next year, which we think can be pretty sustainable going forward. historic-dividend

Caledonia Investments Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2012, the dividend has gone from UK£0.43 to UK£0.65. This works out to be a compound annual growth rate (CAGR) of approximately 4.2% a year over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

The Dividend Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. Caledonia Investments has seen EPS rising for the last five years, at 16% per annum. With a decent amount of growth and a low payout ratio, we think this bodes well for Caledonia Investments' prospects of growing its dividend payments in the future.



Our Thoughts On Caledonia Investments' Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Caledonia Investments is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for Caledonia Investments that investors should take into consideration. Is Caledonia Investments not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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