The board of RGC Resources, Inc. (NASDAQ:RGCO) has announced that it will be paying its dividend of $0.2075 on the 1st of February, an increased payment from last year's comparable dividend. This takes the annual payment to 4.1% of the current stock price, which is about average for the industry.

See our latest analysis for RGC Resources

RGC Resources' Payment Could Potentially Have Solid Earnings Coverage

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Based on the last payment, RGC Resources' earnings were much higher than the dividend, but it wasn't converting those earnings into cash flow. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.

Over the next year, EPS could expand by 1.2% if recent trends continue. If the dividend continues on this path, the payout ratio could be 73% by next year, which we think can be pretty sustainable going forward.

RGC Resources Has A Solid Track Record

The company has an extended history of paying stable dividends. The dividend has gone from an annual total of $0.493 in 2014 to the most recent total annual payment of $0.83. This implies that the company grew its distributions at a yearly rate of about 5.3% over that duration. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.

Dividend Growth May Be Hard To Achieve

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. RGC Resources hasn't seen much change in its earnings per share over the last five years. Growth of 1.2% per annum is not particularly high, which might explain why the company is paying out a higher proportion of earnings. This isn't necessarily bad, but we wouldn't expect rapid dividend growth in the future.

In Summary

Overall, we always like to see the dividend being raised, but we don't think RGC Resources will make a great income stock. While RGC Resources is earning enough to cover the payments, the cash flows are lacking. This company is not in the top tier of income providing stocks.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, RGC Resources has 3 warning signs (and 2 which make us uncomfortable) we think you should know about. Is RGC Resources 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.