The board of Australian Foundation Investment Company Limited (ASX:AFI) has announced that it will pay a dividend of A$0.14 per share on the 1st of September. The dividend yield is 3.5% based on this payment, which is a little bit low compared to the other companies in the industry.

See our latest analysis for Australian Foundation Investment

Australian Foundation Investment Is Paying Out More Than It Is Earning

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.

Earnings per share could rise by 1.2% over the next year if things go the same way as they have for the last few years. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 100% over the next year. historic-dividend

Australian Foundation Investment Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. Since 2013, the annual payment back then was A$0.22, compared to the most recent full-year 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.

The Dividend's Growth Prospects Are Limited

Investors could be attracted to the stock based on the quality of its payment history. Although it's important to note that Australian Foundation Investment's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. So the company has struggled to grow its EPS yet it's still paying out 100% of its earnings. Limited recent earnings growth and a high payout ratio makes it hard for us to envision strong future dividend growth, unless the company should have substantial pricing power or some form of competitive advantage.

Australian Foundation Investment's Dividend Doesn't Look Sustainable

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Australian Foundation Investment's payments, as there could be some issues with sustaining them into the future. Although they have been consistent in the past, we think the payments are a little high to be sustained. We don't think Australian Foundation Investment is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 2 warning signs for Australian Foundation Investment that you should be aware of before investing. Is Australian Foundation Investment 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.

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