The York Water Company (NASDAQ:YORW) will increase its dividend on the 15th of January to $0.2192, which is 4.0% higher than last year's payment from the same period of $0.211. This takes the annual payment to 2.3% of the current stock price, which is about average for the industry.

York Water's Payment Could Potentially Have Solid Earnings Coverage

Unless the payments are sustainable, the dividend yield doesn't mean too much. Based on the last payment, York Water's earnings were much higher than the dividend, but it wasn't converting those earnings into cash flow. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.

Over the next year, EPS is forecast to expand by 4.4%. If the dividend continues on this path, the payout ratio could be 57% by next year, which we think can be pretty sustainable going forward.

York Water Has A Solid Track Record

The company has an extended history of paying stable dividends. The annual payment during the last 10 years was $0.572 in 2014, and the most recent fiscal year payment was $0.843. This works out to be a compound annual growth rate (CAGR) of approximately 3.9% a year over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

We Could See York Water's Dividend Growing

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. We are encouraged to see that York Water has grown earnings per share at 5.4% per year over the past five years. The company is paying out a lot of its cash as a dividend, but it looks okay based on the payout ratio.

Our Thoughts On York Water's Dividend

Overall, we always like to see the dividend being raised, but we don't think York Water will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, York Water has 2 warning signs (and 1 which is potentially serious) we think you should know about. 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.