Vermilion Energy Inc. (TSE:VET) will increase its dividend from last year's comparable payment on the 15th of April to CA$0.13. This takes the annual payment to 4.8% of the current stock price, which is about average for the industry.

See our latest analysis for Vermilion Energy

Vermilion Energy Might Find It Hard To Continue The Dividend

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Even though Vermilion Energy 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.

Over the next year, EPS is forecast to fall quite dramatically. This will make the company unprofitable, and if cash flows fall along with it, the cash payout ratio could rise and put the dividend in jeopardy.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2015, the annual payment back then was CA$2.58, compared to the most recent full-year payment of CA$0.52. This works out to a decline of approximately 80% over that time. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

The Company Could Face Some Challenges Growing The Dividend

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. It's encouraging to see that Vermilion Energy has been growing its earnings per share at 17% a year over the past five years. It's not great that the company is not turning a profit, but the decent growth in recent years is certainly a positive sign. As long as the company becomes profitable soon, it is on a trajectory that could see it being a solid dividend payer.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Vermilion Energy has 2 warning signs (and 1 which is significant) we think you should know about. Is Vermilion Energy 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.