The board of Commonwealth Bank of Australia (ASX:CBA) has announced that it will pay a dividend on the 28th of March, with investors receiving A$2.25 per share. Even though the dividend went up, the yield is still quite low at only 2.8%.

View our latest analysis for Commonwealth Bank of Australia

Commonwealth Bank of Australia's Earnings Will Easily Cover The Distributions

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock.

Commonwealth Bank of Australia has established itself as a dividend paying company with over 10 years history of distributing earnings to shareholders. Past distributions do not necessarily guarantee future ones, but Commonwealth Bank of Australia's payout ratio of 81% is a good sign as this means that earnings decently cover dividends.

Over the next 3 years, EPS is forecast to expand by 12.6%. The future payout ratio over that same time horizon is estimated by analysts to be 81% which is a bit high but can definitely be sustainable.

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 dividend has gone from A$3.83 total annually to A$4.65. This implies that the company grew its distributions at a yearly rate of about 2.0% over that duration. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

We Could See Commonwealth Bank of Australia's Dividend Growing

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. Commonwealth Bank of Australia has impressed us by growing EPS at 5.4% per year over the past five years. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.

Our Thoughts On Commonwealth Bank of Australia's Dividend

Overall, we always like to see the dividend being raised, but we don't think Commonwealth Bank of Australia will make a great income stock. The track record isn't great, and the payments are a bit high to be considered sustainable. We don't think Commonwealth Bank of Australia is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for Commonwealth Bank of Australia that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.