KeyCorp (NYSE:KEY) will pay a dividend of $0.205 on the 15th of September. This means the annual payment is 4.5% of the current stock price, which is above the average for the industry.

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KeyCorp's Payment Expected To Have Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable.

Having distributed dividends for at least 10 years, KeyCorp has a long history of paying out a part of its earnings to shareholders. Past distributions unfortunately do not guarantee future ones, and KeyCorp's last earnings report actually showed that the company went over its net earnings in its total dividend distribution. This is an alarming sign for the sustainability of its dividends, as it may mean that KeyCorpis pulling cash from elsewhere to keep its shareholders happy.

The next 3 years are set to see EPS grow by 188.8%. Analysts forecast the future payout ratio could be 45% over the same time horizon, which is a number we think the company can maintain.

View our latest analysis for KeyCorp

KeyCorp 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 annual payment during the last 10 years was $0.26 in 2015, and the most recent fiscal year payment was $0.82. This means that it has been growing its distributions at 12% per annum over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.

The Dividend Has Limited Growth Potential

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. However, things aren't all that rosy. Over the past five years, it looks as though KeyCorp's EPS has declined at around 23% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

We should note that KeyCorp has issued stock equal to 16% of shares outstanding. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

The Dividend Could Prove To Be Unreliable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 2 warning signs for KeyCorp 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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