Methode Electronics, Inc. (NYSE:MEI) will pay a dividend of $0.14 on the 2nd of May. This makes the dividend yield 8.2%, which will augment investor returns quite nicely.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Methode Electronics' stock price has reduced by 42% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.

Methode Electronics' Projections Indicate Future Payments May Be Unsustainable

Estimates Indicate Methode Electronics' Could Struggle to Maintain Dividend Payments In The Future

Methode Electronics' Future Dividends May Potentially Be At Risk

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Even in the absence of profits, Methode Electronics is paying a dividend. It is also not generating any free cash flow, we definitely have concerns when it comes to the sustainability of the dividend.

Earnings per share is forecast to rise by 110.6% over the next year. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio getting very high over the next year.

See our latest analysis for Methode Electronics

Methode Electronics Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. The annual payment during the last 10 years was $0.36 in 2015, and the most recent fiscal year payment was $0.56. This means that it has been growing its distributions at 4.5% per annum over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

Dividend Growth Potential Is Shaky

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. Methode Electronics' EPS has fallen by approximately 52% per year during the past five years. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

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. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Methode Electronics has 2 warning signs (and 1 which is concerning) we think you should know about. Is Methode Electronics not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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