The Reject Shop Limited (ASX:TRS) has announced that it will be increasing its periodic dividend on the 1st of May to A$0.12, which will be 20% higher than last year's comparable payment amount of A$0.10. This takes the dividend yield to 3.0%, which shareholders will be pleased with.

View our latest analysis for Reject Shop

Reject Shop's Future Dividend Projections Appear Well Covered By Earnings

If the payments aren't sustainable, a high yield for a few years won't matter that much. The last payment made up 81% of earnings, but cash flows were much higher. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Looking forward, earnings per share is forecast to rise by 136.5% over the next year. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 35% which brings it into quite a comfortable range.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2015, the dividend has gone from A$0.30 total annually to A$0.10. The dividend has fallen 67% over that period. A company that decreases its dividend over time generally isn't what we are looking for.

Reject Shop Might Find It Hard To Grow Its Dividend

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS is growing. Reject Shop has impressed us by growing EPS at 53% per year over the past five years. Earnings per share is growing nicely, but the company is paying out most of its earnings as dividends. This might be sustainable, but we wonder why Reject Shop is not retaining those earnings to reinvest in growth.

Our Thoughts On Reject Shop's Dividend

In summary, while it's always good to see the dividend being raised, we don't think Reject Shop's payments are rock solid. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We don't think Reject Shop 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. 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 picked out 3 warning signs for Reject Shop that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield 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.