The board of Fastenal Company (NASDAQ:FAST) has announced that it will be paying its dividend of $0.44 on the 23rd of May, an increased payment from last year's comparable dividend. Based on this payment, the dividend yield for the company will be 1.9%, which is fairly typical for the industry.

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Fastenal's Payment Could Potentially Have Solid Earnings Coverage

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Prior to this announcement, Fastenal's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 103% 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 30.3%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 70% which would be quite comfortable going to take the dividend forward.

Check out our latest analysis for Fastenal

Fastenal Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The dividend has gone from an annual total of $0.50 in 2015 to the most recent total annual payment of $1.56. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time. Rapidly growing dividends for a long time is a very valuable feature for an income stock.

Fastenal Could Grow Its Dividend

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. It's encouraging to see that Fastenal has been growing its earnings per share at 7.6% a year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.

Fastenal's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Fastenal will make a great income stock. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. This company is not in the top tier of income providing stocks.

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 1 warning sign for Fastenal that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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