Australian Foundation Investment Company Limited's (ASX:AFI) investors are due to receive a payment of A$0.12 per share on 25th of February. Based on this payment, the dividend yield for the company will be 3.4%, which is fairly typical for the industry.

See our latest analysis for Australian Foundation Investment

Australian Foundation Investment's Future Dividends May Potentially Be At Risk

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, the company was paying out 110% of what it was earning. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.

Looking forward, EPS could fall by 1.6% if the company can't turn things around from the last few years. If the dividend continues along recent trends, we estimate the payout ratio could reach 114%, which could put the dividend in jeopardy if the company's earnings don't improve.

Australian Foundation Investment Has A Solid Track Record

The company has an extended history of paying stable dividends. The dividend has gone from an annual total of A$0.22 in 2015 to the most recent total annual payment of A$0.26. This means that it has been growing its distributions at 1.7% per annum 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.

The Dividend's Growth Prospects Are Limited

The company's investors will be pleased to have been receiving dividend income for some time. Let's not jump to conclusions as things might not be as good as they appear on the surface. Unfortunately, Australian Foundation Investment's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year.

The Dividend Could Prove To Be Unreliable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 1 warning sign for Australian Foundation Investment that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.