3i Group plc's (LON:III) dividend will be increasing from last year's payment of the same period to ￡0.345 on 26th of July. Although the dividend is now higher, the yield is only 2.0%, which is below the industry average.

Check out our latest analysis for 3i Group

3i Group's Payment Has Solid Earnings Coverage

Even a low dividend yield can be attractive if it is sustained for years on end. Prior to this announcement, 3i Group's dividend was only 15% of earnings, however it was paying out 162% of free cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

Over the next year, EPS is forecast to expand by 24.5%. If the dividend continues along recent trends, we estimate the payout ratio will be 15%, which is in the range that makes us comfortable with the sustainability of the dividend.

3i Group Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. Since 2014, the dividend has gone from ￡0.081 total annually to ￡0.61. This works out to be a compound annual growth rate (CAGR) of approximately 22% a year over that time. Rapidly growing dividends for a long time is a very valuable feature for an income stock.

The Dividend Looks Likely To Grow

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. 3i Group has impressed us by growing EPS at 25% per year over the past five years. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

Our Thoughts On 3i Group's Dividend

Overall, we always like to see the dividend being raised, but we don't think 3i Group will make a great income stock. While 3i Group is earning enough to cover the payments, the cash flows are lacking. 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. Earnings growth generally bodes well for the future value of company dividend payments. See if the 9 3i Group analysts we track are forecasting continued growth with our free report on analyst estimates for the company. Is 3i Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.