Black Hills Corporation (NYSE:BKH) has announced that it will be increasing its dividend from last year's comparable payment on the 1st of March to $0.676. This makes the dividend yield about the same as the industry average at 4.5%.

Check out our latest analysis for Black Hills

Black Hills' Projected Earnings Seem Likely To Cover Future Distributions

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Prior to this announcement, Black Hills' dividend was only 67% of earnings, however it was paying out 214% of free cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Looking forward, earnings per share is forecast to rise by 17.1% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 62% by next year, which is in a pretty sustainable range.

Black Hills Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2015, the dividend has gone from $1.56 total annually to $2.7. This works out to be a compound annual growth rate (CAGR) of approximately 5.7% a year over that time. The growth of the dividend has been pretty reliable, so we think this can offer investors some nice additional income in their portfolio.

The Dividend's Growth Prospects Are Limited

Investors could be attracted to the stock based on the quality of its payment history. Earnings has been rising at 3.0% per annum over the last five years, which admittedly is a bit slow. Black Hills is struggling to find viable investments, so it is returning more to shareholders. This isn't bad in itself, but unless earnings growth pick up we wouldn't expect dividends to grow either.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 2 warning signs for Black Hills (1 doesn't sit too well with us!) that you should be aware of before investing. Is Black Hills 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.