The Board of First Capital, Inc. (NASDAQ:FCAP) announced it will increase its dividend by 7.4% to $0.29 on September 27, compared to last year’s comparable payment of $0.27. The payment will increase the dividend yield to 3.4%, which is in line with the industry average.

Check out our latest analysis for First Capital

First Capital’s earnings will easily cover the distributions

While a solid dividend yield is nice, it only really helps us if the distribution is sustainable.

First Capital has established itself as a dividend-paying company, distributing profits to shareholders for over 10 years. The company’s payout ratio is 30%, according to its latest earnings report, meaning First Capital could pay its final dividend without putting pressure on its balance sheet.

If the trend of the last few years continues, earnings per share will grow by 3.6% over the next 12 months. Assuming the dividend stays the same, we believe the payout ratio could be 31% next year, which is in a fairly sustainable range.

First Capital has a solid track record

The company has a long history of paying dividends with very little fluctuation. The annual payment over the past 10 years was $0.80 in 2014 and the payment in the last fiscal year was $1.08. This means that the company has increased its payouts by about 3.0% annually over this period. Slow and steady dividend growth may not sound so exciting, but dividends have been stable for ten years, which makes this offering quite attractive in our opinion.

Dividend growth could be difficult to achieve

The quality of the payment history could attract investors to the stock. Earnings have grown at 3.6% per year over the past five years, which is admittedly a bit slow. Earnings growth is slow, but on the plus side, the dividend payout ratio is low and dividends could grow faster than earnings if the company decides to increase its payout ratio.

We really like First Capital’s dividend

In summary, a dividend increase is always positive, and we are particularly pleased with its overall sustainability. Distributions are fairly easily covered by profits, which are also converted into cash flows. All in all, this meets many of the criteria we look for when selecting a dividend stock.

Market movements provide evidence of how highly a consistent dividend policy is valued compared to a more erratic policy. However, despite the importance of dividend payments, they are not the only factors our readers should know when evaluating a company. You can also find out if shareholders are aligned with insiders’ interests by checking our visualization of insider holdings and trades in First Capital stock. Looking for more high-yield dividend ideas? Try our Collection of strong dividend payers.

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