The board of Union Pacific Corporation (NYSE:UNP) has announced that the dividend on 30th of September will be increased to $1.38, which will be 3.0% higher than last year's payment of $1.34 which covered the same period. This will take the annual payment to 2.4% of the stock price, which is above what most companies in the industry pay.

Union Pacific's Payment Could Potentially Have Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Based on the last payment, Union Pacific was quite comfortably earning enough to cover the dividend. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.

Looking forward, earnings per share is forecast to rise by 27.1% over the next year. If the dividend continues on this path, the payout ratio could be 42% by next year, which we think can be pretty sustainable going forward.

Union Pacific Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2015, the annual payment back then was $2.00, compared to the most recent full-year payment of $5.36. This means that it has been growing its distributions at 10% per annum over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.

We Could See Union Pacific's Dividend Growing

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Union Pacific has impressed us by growing EPS at 5.5% per year over the past five years. Earnings are on the uptrend, and it is only paying a small portion of those earnings to shareholders.

Union Pacific Looks Like A Great Dividend Stock

In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. The company is easily earning enough to cover its dividend payments and it is great to see that these earnings are being translated into cash flow. 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. 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.