Compass Diversified's (NYSE:CODI) investors are due to receive a payment of $0.25 per share on 23rd of January. This means the annual payment is 4.6% of the current stock price, which is above the average for the industry.

See our latest analysis for Compass Diversified

Compass Diversified's Long-term Dividend Outlook appears Promising

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Even in the absence of profits, Compass Diversified is paying a dividend. It is also not generating any free cash flow, we definitely have concerns when it comes to the sustainability of the dividend.

Looking forward, earnings per share is forecast to rise exponentially over the next year. If the dividend extends its recent trend, estimates say the dividend could reach 6.4%, which we would be comfortable to see continuing.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2015, the annual payment back then was $1.44, compared to the most recent full-year payment of $1.00. Doing the maths, this is a decline of about 3.6% per year. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

Compass Diversified 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. Compass Diversified has seen earnings per share falling at 2.0% per year over the last five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. 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.

Compass Diversified's Dividend Doesn't Look Great

In summary, while it is good to see that the dividend hasn't been cut, we think that at current levels the payment isn't particularly sustainable. The company seems to be stretching itself a bit to make such big payments, but it doesn't appear they can be consistent over time. We don't think that this is a great candidate to be an income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs for Compass Diversified that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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