Suncorp Group Limited (ASX:SUN) has announced that it will increase its dividend on September 25 to A$0.44 compared to last year’s comparable payment, bringing the dividend yield to 4.3%, which will be good news for shareholders.

Check out our latest analysis for Suncorp Group

Suncorp Group’s dividend is well covered by earnings

While an impressive dividend yield is good, that doesn’t matter so much if the payments can’t be sustained. Based on the last payment, Suncorp Group’s profits weren’t enough to cover the dividend, but the company generated enough cash instead. Generally speaking, we think cash is more important than accounting profit metrics, so since the cash flows easily cover the dividend, we don’t think there’s anything to worry about.

Earnings per share are expected to grow by 52.0% next year. If the dividend follows recent trends, we estimate the payout ratio to be 67%. This would convince us of a sustainable dividend payout despite the currently quite high dividend yields.

Dividend volatility

The company has a long dividend history, but it doesn’t look good due to past cuts. Since 2014, the dividend has fallen from a total of A$0.927 annually to A$0.78. The dividend has shrunk by about 1.7% annually over that period. Generally, we don’t like dividends to decline over time, as this can reduce shareholder returns and indicate that the company may be in trouble.

Dividend growth prospects are limited

Rising earnings per share could be a mitigating factor, considering past dividend fluctuations. Over the past five years, Suncorp Group’s earnings per share appear to have declined by about 2.5% per year. A modest decline in earnings isn’t great, and makes it fairly unlikely that the dividend will rise in the future unless this trend can be reversed. It’s not all bad news, though, with earnings forecast to rise over the next 12 months – we’d just be a little cautious until this can develop into a longer-term trend.

The dividend could prove unreliable

Overall, we’re always happy to see dividend increases, but we don’t think Suncorp Group will be a good dividend stock. The company generates a lot of money, which could sustain the dividend for a while, but the track record isn’t great. Overall, we don’t think this company has what it takes to be a good dividend stock.

Companies with a stable dividend policy are likely to attract more interest from investors than those with a more inconsistent approach. At the same time, there are other factors that our readers should consider before putting capital into a stock. We have taken the debate a little further and found that 1 warning signal for the Suncorp Group that investors need to be aware that they are moving forward. Looking for more high yield dividend ideas? Try our Collection of strong dividend payers.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.