discoverIE Group plc (LON:DSCV) will increase its dividend on the 2nd of August to ￡0.0825, which is 4.4% higher than last year's payment from the same period of ￡0.079. The payment will take the dividend yield to 1.7%, which is in line with the average for the industry.

See our latest analysis for discoverIE Group

discoverIE Group's Payment Has Solid Earnings Coverage

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Before this announcement, discoverIE Group was paying out 74% of earnings, but a comparatively small 32% of free cash flows. This leaves plenty of cash for reinvestment into the business.

Looking forward, earnings per share is forecast to rise by 82.7% over the next year. If the dividend continues on this path, the payout ratio could be 42% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2014, the dividend has gone from ￡0.085 total annually to ￡0.12. This works out to be a compound annual growth rate (CAGR) of approximately 3.5% a year over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

discoverIE Group May Find It Hard To Grow The Dividend

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though discoverIE Group's EPS has declined at around 4.2% a year. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think discoverIE Group's payments are rock solid. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We don't think discoverIE Group is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 1 warning sign for discoverIE Group that investors should take into consideration. Is discoverIE Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.