The board of Hawthorn Bancshares, Inc. (NASDAQ:HWBK) has announced that the dividend on 1st of July will be increased to $0.19, which will be 12% higher than last year's payment of $0.17 which covered the same period. This takes the annual payment to 3.6% of the current stock price, which is about average for the industry.

View our latest analysis for Hawthorn Bancshares

Hawthorn Bancshares Will Pay Out More Than It Is Earning

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue.

Hawthorn Bancshares has a long history of paying out dividends, with its current track record at a minimum of 10 years. Despite this history however, the company's latest earnings report actually shows that it didn't have enough earnings to cover its dividends. This is an alarming sign for the sustainability of its dividends, as it may mean that Hawthorn Bancsharesis pulling cash from elsewhere to keep its shareholders happy.

If the company can't turn things around, EPS could fall by 30.0% over the next year. If the dividend continues along recent trends, we estimate the future payout ratio could reach 383%, which could put the dividend in jeopardy if the company's earnings don't improve.

Hawthorn Bancshares Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from an annual total of $0.13 in 2014 to the most recent total annual payment of $0.68. This implies that the company grew its distributions at a yearly rate of about 18% over that duration. 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 Has Limited Growth Potential

The company's investors will be pleased to have been receiving dividend income for some time. However, things aren't all that rosy. Earnings per share has been sinking by 30% over the last five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future.

The Dividend Could Prove To Be Unreliable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Hawthorn Bancshares has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.