Steel Dynamics, Inc.'s (NASDAQ:STLD) dividend will be increasing from last year's payment of the same period to $0.50 on 11th of April. Even though the dividend went up, the yield is still quite low at only 1.6%.

View our latest analysis for Steel Dynamics

Steel Dynamics' Projected Earnings Seem Likely To Cover Future Distributions

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Prior to this announcement, Steel Dynamics' earnings easily covered the dividend, but free cash flows were negative. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.

Looking forward, earnings per share is forecast to rise by 37.6% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 15%, which is in the range that makes us comfortable with the sustainability of the dividend.

Steel Dynamics Has A Solid Track Record

The company has an extended history of paying stable dividends. The annual payment during the last 10 years was $0.46 in 2015, and the most recent fiscal year payment was $2.00. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.

The Dividend Looks Likely To Grow

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. It's encouraging to see that Steel Dynamics has been growing its earnings per share at 27% a year over the past five years. A low payout ratio gives the company a lot of flexibility, and growing earnings also make it very easy for it to grow the dividend.

Our Thoughts On Steel Dynamics' Dividend

In summary, while it's always good to see the dividend being raised, we don't think Steel Dynamics' payments are rock solid. While Steel Dynamics is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. 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 3 warning signs for Steel Dynamics that investors need to be conscious of moving forward. 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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