Monolithic Power Systems, Inc. (NASDAQ:MPWR) has announced that it will be increasing its dividend from last year's comparable payment on the 15th of April to $2.00. This takes the annual payment to 0.7% of the current stock price, which is about average for the industry.

Monolithic Power Systems' Payment Could Potentially Have Solid Earnings Coverage

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, Monolithic Power Systems' dividend was comfortably covered by both cash flow and earnings. This means that a large portion of its earnings are being retained to grow the business.

Looking forward, earnings per share is forecast to rise by 113.3% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 30% by next year, which is in a pretty sustainable range.

Monolithic Power Systems Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. Since 2016, the dividend has gone from $0.80 total annually to $8.00. This works out to be a compound annual growth rate (CAGR) of approximately 26% a year over that time. It is good to see that there has been strong dividend growth, and that there haven't been any cuts for a long time.

The Dividend Looks Likely To Grow

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Monolithic Power Systems has seen EPS rising for the last five years, at 28% per annum. Monolithic Power Systems is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.

Monolithic Power Systems Looks Like A Great Dividend Stock

Overall, a dividend increase is always good, and we think that Monolithic Power Systems is a strong income stock thanks to its track record and growing earnings. Distributions are quite easily covered by earnings, which are also being converted to cash flows. All of these factors considered, we think this has solid potential as a dividend stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Is Monolithic Power Systems not quite the opportunity you were looking for? Why not check out our selection of top 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.