Challenger Limited's (ASX:CGF) dividend will be increasing from last year's payment of the same period to A$0.13 on 19th of March. This makes the dividend yield about the same as the industry average at 3.7%.

Check out our latest analysis for Challenger

Challenger's Payment Has Solid Earnings Coverage

Unless the payments are sustainable, the dividend yield doesn't mean too much. Prior to this announcement, Challenger's dividend was comfortably covered by both cash flow and earnings. This means that a large portion of its earnings are being retained to grow the business.

Over the next year, EPS is forecast to expand by 51.7%. Assuming the dividend continues along recent trends, we think the payout ratio could be 35% by next year, which is in a pretty sustainable range. historic-dividend

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2014, the annual payment back then was A$0.20, compared to the most recent full-year payment of A$0.26. This implies that the company grew its distributions at a yearly rate of about 2.7% over that duration. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Challenger has grown earnings per share at 16% per year over the past five years. Earnings are on the uptrend, and it is only paying a small portion of those earnings to shareholders.

Challenger Looks Like A Great Dividend Stock

In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. Earnings are easily covering distributions, and the company is generating plenty of cash. All of these factors considered, we think this has solid potential as a dividend stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 2 warning signs for Challenger that investors should take into consideration. Is Challenger 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.