NRW Holdings Limited's (ASX:NWH) dividend will be increasing from last year's payment of the same period to A$0.08 on 11th of October. This will take the dividend yield to an attractive 5.9%, providing a nice boost to shareholder returns.

See our latest analysis for NRW Holdings

NRW Holdings' Dividend Is Well Covered By Earnings

If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, NRW Holdings was paying out quite a large proportion of both earnings and cash flow, with the dividend being 129% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Over the next year, EPS is forecast to expand by 52.2%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 57% which would be quite comfortable going to take the dividend forward. historic-dividend

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2013, the annual payment back then was A$0.20, compared to the most recent full-year payment of A$0.165. This works out to be a decline of approximately 1.9% per year over that time. A company that decreases its dividend over time generally isn't what we are looking for.

NRW Holdings' Dividend Might Lack Growth

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. NRW Holdings has seen EPS rising for the last five years, at 10% per annum. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

The Dividend Could Prove To Be Unreliable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. Strong earnings growth means NRW Holdings has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for NRW Holdings that you should be aware of before investing. Is NRW Holdings 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.