The board of Hess Midstream LP (NYSE:HESM) has announced that it will be paying its dividend of $0.7012 on the 14th of February, an increased payment from last year's comparable dividend. This makes the dividend yield 6.5%, which is above the industry average.

Check out our latest analysis for Hess Midstream

Estimates Indicate Hess Midstream's Could Struggle to Maintain Dividend Payments In The Future

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, the company's dividend was higher than its profits, and made up 91% of cash flows. This indicates that the company could be more focused on returning cash to shareholders than reinvesting to grow the business.

EPS is set to fall by 3.5% over the next 12 months. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 155%, which is definitely a bit high to be sustainable going forward.

Hess Midstream Doesn't Have A Long Payment History

Hess Midstream's dividend has been pretty stable for a little while now, but we will continue to be cautious until it has been demonstrated for a few more years. The dividend has gone from an annual total of $1.20 in 2017 to the most recent total annual payment of $2.74. This works out to be a compound annual growth rate (CAGR) of approximately 11% a year over that time. Hess Midstream has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

The Dividend Has Limited Growth Potential

Investors could be attracted to the stock based on the quality of its payment history. Let's not jump to conclusions as things might not be as good as they appear on the surface. Earnings per share has been sinking by 10% over the last five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough.

Hess Midstream's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Hess Midstream's payments are rock solid. The track record isn't great, and the payments are a bit high to be considered sustainable. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 2 warning signs for Hess Midstream (1 is significant!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.