Korvest Ltd (ASX:KOV) has announced that it will pay a dividend of A$0.25 per share on the 7th of March. Based on this payment, the dividend yield on the company's stock will be 6.3%, which is an attractive boost to shareholder returns.

See our latest analysis for Korvest

Korvest's Payment Could Potentially Have Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. At the time of the last dividend payment, Korvest was paying out a very large proportion of what it was earning and 119% of cash flows. This is certainly a risk factor, as reduced cash flows could force the company to pay a lower dividend.

Looking forward, earnings per share could rise by 18.2% over the next year if the trend from the last few years continues. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 75% which brings it into quite a comfortable range.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of A$0.46 in 2015 to the most recent total annual payment of A$0.65. This means that it has been growing its distributions at 3.5% per annum over that time. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

Korvest's Dividend Might Lack Growth

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that Korvest has been growing its earnings per share at 18% a 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.

The Dividend Could Prove To Be Unreliable

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Korvest's payments, as there could be some issues with sustaining them into the future. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 2 warning signs for Korvest that investors need to be conscious of moving forward. Is Korvest 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.