Argo Investments Limited's (ASX:ARG) dividend will be increasing from last year's payment of the same period to A$0.165 on 10th of March. Based on this payment, the dividend yield for the company will be 3.5%, which is fairly typical for the industry.

View our latest analysis for Argo Investments

Argo Investments' Earnings Easily Cover The Distributions

Solid dividend yields are great, but they only really help us if the payment is sustainable. At the time of the last dividend payment, Argo Investments was paying out a very large proportion of what it was earning and 123% 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.

EPS is set to grow by 6.3% over the next year if recent trends continue. If the dividend continues along recent trends, we estimate the payout ratio could reach 75%, which is on the higher side, but certainly still feasible.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was A$0.26 in 2013, and the most recent fiscal year payment was A$0.34. This means that it has been growing its distributions at 2.7% per annum over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

The Dividend Has Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. We are encouraged to see that Argo Investments has grown earnings per share at 6.3% per 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.

Argo Investments' Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Argo Investments' payments are rock solid. The track record isn't great, and the payments are a bit high to be considered sustainable. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 2 warning signs for Argo Investments 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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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.

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