Caledonia Investments Plc (LON:CLDN) has announced that it will be increasing its dividend from last year’s comparable payment on the 1st of August to £0.5147. Even though the dividend went up, the yield is still quite low at only 2.1%.

View our latest analysis for Caledonia Investments

Caledonia Investments’ Payment Has Solid Earnings Coverage

While yield is important, another factor to consider about a company’s dividend is whether the current payout levels are feasible. However, Caledonia Investments’ earnings easily cover the dividend. This means that most of what the business earns is being used to help it grow.

If the trend of the last few years continues, EPS will grow by 0.9% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio will be 19%, which is in the range that makes us comfortable with the sustainability of the dividend.

Caledonia Investments Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. Since 2014, the annual payment back then was £0.472, compared to the most recent full-year payment of £0.704. This works out to be a compound annual growth rate (CAGR) of approximately 4.1% a year over that time. Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think makes this a fairly attractive offer.

Caledonia Investments May Find It Hard To Grow The Dividend

Investors could be attracted to the stock based on the quality of its payment history. Although it’s important to note that Caledonia Investments’ earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. Earnings growth is slow, but on the plus side, the dividend payout ratio is low and dividends could grow faster than earnings, if the company decides to increase its payout ratio.

We Really Like Caledonia Investments’ Dividend

Overall, a dividend increase is always good, and we think that Caledonia Investments is a strong income stock thanks to its track record and growing earnings. The company is easily earning enough to cover its dividend payments and it is great to see that these earnings are being translated into cash flow. All in all, this checks a lot of the boxes we look for when choosing an income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Now, if you want to look closer, it would be worth checking out our free research on Caledonia Investments management tenure, salary, and performance. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.