First Merchants Corporation's (NASDAQ:FRME) investors are due to receive a payment of $0.35 per share on 20th of December. This means that the annual payment will be 3.2% of the current stock price, which is in line with the average for the industry.

See our latest analysis for First Merchants

First Merchants' Payment Expected To Have Solid Earnings Coverage

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

First Merchants has established itself as a dividend paying company with over 10 years history of distributing earnings to shareholders. Based on First Merchants' last earnings report, the payout ratio is at a decent 46%, meaning that the company is able to pay out its dividend with a bit of room to spare.

Looking forward, EPS is forecast to rise by 27.2% over the next 3 years. The future payout ratio could be 40% over that time period, according to analyst estimates, which is a good look for the future of the dividend.

First Merchants 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. Since 2014, the annual payment back then was $0.20, compared to the most recent full-year payment of $1.40. This works out to be a compound annual growth rate (CAGR) of approximately 21% a year over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.

Dividend Growth May Be Hard To Achieve

The company's investors will be pleased to have been receiving dividend income for some time. However, things aren't all that rosy. However, First Merchants' EPS was effectively flat over the past five years, which could stop the company from paying more every year.

In Summary

Overall, a consistent dividend is a good thing, and we think that First Merchants has the ability to continue this into the future. While the payments look sustainable for now, earnings have been shrinking so the dividend could come under pressure in the future. The payment isn't stellar, but it could make a decent addition to a dividend portfolio.

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 instance, we've picked out 1 warning sign for First Merchants 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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