The board of Five Star Bancorp (NASDAQ:FSBC) has announced that it will pay a dividend on the 12th of November, with investors receiving $0.20 per share. This means the dividend yield will be fairly typical at 2.6%.

Check out our latest analysis for Five Star Bancorp

Five Star Bancorp's Payment Expected To Have Solid Earnings Coverage

We aren't too impressed by dividend yields unless they can be sustained over time.

Five Star Bancorp is just starting to establish itself as being able to pay dividends to shareholders, given its short 3-year history of distributing earnings. Diving into the company's earnings report, the payout ratio is set at 34%, which is a decent ratio of dividend payout to earnings, and may sustain future dividends if the company stays at its current trend.

Over the next 3 years, EPS is forecast to expand by 29.1%. Analysts forecast the future payout ratio could be 29% over the same time horizon, which is a number we think the company can maintain.

Five Star Bancorp Doesn't Have A Long Payment History

The company has maintained a consistent dividend for a few years now, but we would like to see a longer track record before relying on it. Since 2021, the annual payment back then was $0.60, compared to the most recent full-year payment of $0.80. This works out to be a compound annual growth rate (CAGR) of approximately 10% a year over that time. We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.

Dividend Growth May Be Hard To Come By

The company's investors will be pleased to have been receiving dividend income for some time. However, initial appearances might be deceiving. Over the past five years, it looks as though Five Star Bancorp's EPS has declined at around 9.8% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

An additional note is that the company has been raising capital by issuing stock equal to 24% of shares outstanding in the last 12 months. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Our Thoughts On Five Star Bancorp's Dividend

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments Five Star Bancorp has been making. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular 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 3 warning signs for Five Star Bancorp that investors should take into consideration. 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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