The advice of Duxton Water Limited (ASX: D2O) announced that it will increase its dividend by 6.9% on October 29 to AU $ 0.031. The dividend yield is therefore 4.3%, which is higher than the industry average.

Check out our latest review for Duxton Water

Duxton Water profits easily cover distributions

Impressive dividend yields are good, but it doesn’t matter much if the payouts can’t be sustained. The last dividend was fairly comfortably covered by Duxton Water earnings, but it was a bit tighter on the cash flow front. The company is clearly earning enough to pay this type of dividend, but it is definitely focused on returning money to shareholders rather than growing the business.

Over the next year, EPS could increase by 56.7% if recent trends continue. If the dividend continues according to recent trends, we estimate that the payout ratio will be 33%, which is within the range that puts us at ease with the sustainability of the dividend.

Duxton Water does not have a long payment history

The company has maintained a constant dividend for a few years now, but we’d like to see a longer history before we put our trust in it. Since 2017, the dividend has increased from AU $ 0.023 to AU $ 0.062. This implies that the company has increased its distributions at an annual rate of approximately 28% over this period. The dividend has grown rapidly, but with such a short payment history, we cannot be sure whether the payout can continue to rise in the long term, so caution is in order.

The dividend seems likely to increase

Investors who have held shares of the company for the past several years will be pleased with the dividend income they have received. It is encouraging to see that Duxton Water has increased its earnings per share by 57% per year over the past three years. The company’s earnings per share have grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we believe Duxton Water could prove to be a solid dividend payer.

Our thoughts on the Duxton Water dividend

Overall, it’s probably not a high-income stock, although the dividend is being increased. While Duxton Water earns enough to cover the dividend, we are generally not impressed with its prospects for the future. We don’t think Duxton Water is a great stock to add to your portfolio if income is your primary goal.

Companies with a stable dividend policy are likely to benefit from greater investor interest than those with a more inconsistent approach. However, there are other things for investors to consider when analyzing the performance of stocks. To this end, Duxton Water has 3 warning signs (and 1 that can’t be ignored) we think you should be aware of. We have also set up a list of global stocks with a solid dividend.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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