The board of Perpetual Limited (ASX:PPT) has announced that it will pay a dividend of A$0.61 per share on the 4th of April. The yield is still above the industry average at 5.9%.

Check out our latest analysis for Perpetual

Estimates Indicate Perpetual's Dividend Coverage Likely To Improve

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Even though Perpetual isn't generating a profit, it is generating healthy free cash flows that easily cover the dividend. This gives us some comfort about the level of the dividend payments.

According to analysts, EPS should be several times higher next year. Assuming the dividend continues along recent trends, we think the payout ratio will be 3.3%, which makes us pretty comfortable with the sustainability of the dividend.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2015, the annual payment back then was A$1.90, compared to the most recent full-year payment of A$1.18. Doing the maths, this is a decline of about 4.7% per year. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

The Dividend Has Limited Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Perpetual's EPS has fallen by approximately 58% per year during the past five years. 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.

Perpetual's Dividend Doesn't Look Sustainable

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We don't think Perpetual 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. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 1 warning sign for Perpetual that investors should take into consideration. Is Perpetual 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.