The board of Gilead Sciences, Inc. (NASDAQ:GILD) has announced that the dividend on 28th of March will be increased to $0.79, which will be 2.6% higher than last year's payment of $0.77 which covered the same period. The payment will take the dividend yield to 3.0%, which is in line with the average for the industry.

See our latest analysis for Gilead Sciences

Gilead Sciences' Projected Earnings Seem Likely To Cover Future Distributions

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, the company was paying out 800% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 37%. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

Analysts expect a massive rise in earnings per share in the next year. If recent patterns in the dividend continue, we could see the payout ratio reaching 48% which is fairly sustainable.

Gilead Sciences Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. Since 2015, the dividend has gone from $1.72 total annually to $3.08. This works out to be a compound annual growth rate (CAGR) of approximately 6.0% a year over that time. The growth of the dividend has been pretty reliable, so we think this can offer investors some nice additional income in their portfolio.

Dividend Growth Potential Is Shaky

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. However, things aren't all that rosy. Over the past five years, it looks as though Gilead Sciences' EPS has declined at around 38% a year. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

Our Thoughts On Gilead Sciences' Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. As an example, we've identified 5 warning signs for Gilead Sciences that you should be aware of before investing. 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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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.