VGI Partners Limited (ASX:VGI) will increase its dividend on the 10th of September to AU$0.31. This will take the dividend yield from 8.6% to 8.6%, providing a nice boost to shareholder returns.

Check out our latest analysis for VGI Partners

VGI Partners' Dividend Is Well Covered By Earnings

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, VGI Partners' dividend was only 63% of earnings, however it was paying out 125% of free cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

Looking forward, could fall by 33.1% if the company can't turn things around from the last few years. If recent patterns in the dividend continue, we could see the payout ratio reaching 94% in the next 12 months which is on the higher end of the range we would say is sustainable.

VGI Partners' Dividend Has Lacked Consistency

The track record isn't the longest, but we are already seeing a bit of instability in the payments. The first annual payment during the last 2 years was AU$0.51 in 2019, and the most recent fiscal year payment was AU$0.59. This means that it has been growing its distributions at 7.3% per annum over that time. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

The Dividend Has Limited Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Earnings per share has been sinking by 33% over the last five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future.

VGI Partners' Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 2 warning signs for VGI Partners (of which 1 is significant!) you should know about. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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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