The board of AGCO Corporation (NYSE:AGCO) has announced that it will pay a dividend on the 15th of September, with investors receiving $0.29 per share. The dividend yield will be 3.4% based on this payment which is still above the industry average.

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AGCO's Future Dividend Projections Seem Positive

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Even though AGCO isn't generating a profit, it is generating healthy free cash flows that easily cover the dividend. In general, cash flows are more important than the more traditional measures of profit so we feel pretty comfortable with the dividend at this level.

Looking forward, earnings per share is forecast to rise exponentially over the next year. If the dividend extends its recent trend, estimates say the dividend could reach 9.1%, which we would be comfortable to see continuing.

See our latest analysis for AGCO

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was $0.44 in 2015, and the most recent fiscal year payment was $3.66. This works out to be a compound annual growth rate (CAGR) of approximately 24% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

AGCO May Find It Hard To Grow The Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's not great to see that AGCO's earnings per share has fallen at approximately 2.5% per year over the past five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

The Dividend Could Prove To Be Unreliable

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about AGCO's payments, as there could be some issues with sustaining them into the future. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. 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. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs for AGCO that investors need to be conscious of moving forward. 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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