Provident Financial Services, Inc. (NYSE:PFS) will pay a dividend of $0.24 on the 29th of November. Based on this payment, the dividend yield on the company's stock will be 5.1%, which is an attractive boost to shareholder returns.

Provident Financial Services' Dividend Forecasted To Be Well Covered By Earnings

A big dividend yield for a few years doesn't mean much if it can't be sustained.

Provident Financial Services has established itself as a dividend paying company with over 10 years history of distributing earnings to shareholders. While having a long history of dividends is a good sign, Provident Financial Services' latest earning reports show that its payout ratio - the ratio of the dividend amount to earnings - currently sits at 98%. This is a sign that Provident Financial Services is barely covering its dividend.

Over the next 3 years, EPS is forecast to expand by 180.0%. Analyst estimates also show the future payout ratio being 44% in the same 3 years which brings it into quite a comfortable range.

Provident Financial Services Has A Solid Track Record

The company has an extended history of paying stable dividends. The annual payment during the last 10 years was $0.60 in 2014, and the most recent fiscal year payment was $0.96. This implies that the company grew its distributions at a yearly rate of about 4.8% over that duration. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

Dividend Growth Potential Is Shaky

Investors could be attracted to the stock based on the quality of its payment history. However, things aren't all that rosy. Provident Financial Services' EPS has fallen by approximately 17% per year during the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

We should note that Provident Financial Services has issued stock equal to 74% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Our Thoughts On Provident Financial Services' Dividend

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. Although they have been consistent in the past, we think the payments are a little high to be sustained. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Provident Financial Services has 4 warning signs (and 1 which can't be ignored) we think you should know about. Is Provident Financial Services 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.