Financial Institutions, Inc. (NASDAQ:FISI) will increase its dividend on the 2nd of April to $0.31, which is 3.3% higher than last year's payment from the same period of $0.30. This makes the dividend yield 4.2%, which is above the industry average.

View our latest analysis for Financial Institutions

Financial Institutions' Dividend Forecasted To Be Well Covered By Earnings

If the payments aren't sustainable, a high yield for a few years won't matter that much.

Having distributed dividends for at least 10 years, Financial Institutions has a long history of paying out a part of its earnings to shareholders. Past distributions unfortunately do not guarantee future ones, and Financial Institutions' last earnings report actually showed that the company went over its net earnings in its total dividend distribution. This is very worrying for shareholders, as this shows that Financial Institutions will not be able to sustain its dividend at its current rate.

Looking forward, earnings per share is forecast by analysts to rise exponentially over the next 3 years. In addtion, they also estimate the future payout ratio could reach 33% in the same time period, which we would be comfortable to see continuing.

Financial Institutions Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The dividend has gone from an annual total of $0.76 in 2015 to the most recent total annual payment of $1.20. This means that it has been growing its distributions at 4.7% 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.

Dividend Growth May Be Hard To Come By

Investors could be attracted to the stock based on the quality of its payment history. Unfortunately things aren't as good as they seem. Over the past five years, it looks as though Financial Institutions' EPS has declined at around 5.3% a year. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

We should note that Financial Institutions has issued stock equal to 30% of shares outstanding. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Our Thoughts On Financial Institutions' Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. Although they have been consistent in the past, we think the payments are a little high to be sustained. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 2 warning signs for Financial Institutions (of which 1 is a bit unpleasant!) you should know about. Is Financial Institutions not quite the opportunity you were looking for? Why not check out our selection of top 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.