Ethan Allen Interiors Inc. (NYSE:ETD) has announced that it will pay a dividend of $0.39 per share on the 25th of February. This makes the dividend yield 7.9%, which will augment investor returns quite nicely.

Ethan Allen Interiors' Projections Indicate Future Payments May Be Unsustainable

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, Ethan Allen Interiors' was paying out quite a large proportion of earnings and 86% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but it is still in a reasonable range to continue with.

Over the next year, EPS is forecast to fall by 4.3%. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 113%, which is definitely a bit high to be sustainable going forward.

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 2016, the dividend has gone from $0.56 total annually to $1.81. This implies that the company grew its distributions at a yearly rate of about 12% over that duration. Ethan Allen Interiors has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Ethan Allen Interiors Might Find It Hard To Grow Its Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Ethan Allen Interiors has impressed us by growing EPS at 63% per year over the past five years. Fast growing earnings are great, but this can rarely be sustained without some reinvestment into the business, which Ethan Allen Interiors hasn't been doing.

Our Thoughts On Ethan Allen Interiors' Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Ethan Allen Interiors' payments, as there could be some issues with sustaining them into the future. Strong earnings growth means Ethan Allen Interiors has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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.