Commonwealth Bank of Australia (ASX:CBA) will increase its dividend from last year's comparable payment on the 27th of September to A$2.50. Even though the dividend went up, the yield is still quite low at only 3.4%.

View our latest analysis for Commonwealth Bank of Australia

Commonwealth Bank of Australia's Payment Expected To Have Solid Earnings Coverage

Even a low dividend yield can be attractive if it is sustained for years on end.

Commonwealth Bank of Australia has established itself as a dividend paying company with over 10 years history of distributing earnings to shareholders. Taking data from its last earnings report, calculating for the company's payout ratio shows 82%, which means that Commonwealth Bank of Australia would be able to pay its last dividend without pressure on the balance sheet.

EPS is set to grow by 10.0% over the next 3 years. Analysts estimate the future payout ratio could reach 79% over that same time period, which is on the higher side, but certainly still feasible.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of A$3.83 in 2014 to the most recent total annual payment of A$4.65. This means that it has been growing its distributions at 2.0% per annum over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

The Dividend's Growth Prospects Are Limited

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. However, Commonwealth Bank of Australia has only grown its earnings per share at 4.5% per annum over the past five years. Slow growth and a high payout ratio could mean that Commonwealth Bank of Australia has maxed out the amount that it has been able to pay to shareholders. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.

Our Thoughts On Commonwealth Bank of Australia's Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The payments are bit high to be considered sustainable, and the track record isn't the best. We don't think Commonwealth Bank of Australia is a great stock to add to your portfolio if income is your focus.