The board of Discover Financial Services (NYSE:DFS) has announced that it will be increasing its dividend on the 2nd of September to US$0.50. The announced payment will take the dividend yield to 1.5%, which is in line with the average for the industry.

View our latest analysis for Discover Financial Services

Discover Financial Services' Dividend Is Well Covered By Earnings

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. However, Discover Financial Services' earnings easily cover the dividend. This means that most of its earnings are being retained to grow the business.

EPS is set to fall by 7.5% over the next 12 months. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 14%, which is comfortable for the company to continue in the future.

Discover Financial Services Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from US$0.08 in 2011 to the most recent annual payment of US$2.00. This works out to be a compound annual growth rate (CAGR) of approximately 38% a year over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.

The Dividend Looks Likely To Grow

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Discover Financial Services has impressed us by growing EPS at 24% per year over the past five years. A low payout ratio gives the company a lot of flexibility, and growing earnings also make it very easy for it to grow the dividend.

We Really Like Discover Financial Services' Dividend

Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. The company is generating plenty of cash, and the earnings also quite easily cover the distributions. We should point out that the earnings are expected to fall over the next 12 months, which won't be a problem if this doesn't become a trend, but could cause some turbulence in the next year. Taking this all into consideration, this looks like it could be a good dividend opportunity.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 3 warning signs for Discover Financial Services (1 is potentially serious!) 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 performing dividend stock.

This article by Simply Wall St is general in nature. 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.

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