The board of CAR Group Limited (ASX:CAR) has announced that it will be paying its dividend of A$0.345 on the 15th of April, an increased payment from last year's comparable dividend. This makes the dividend yield 2.0%, which is above the industry average.

See our latest analysis for CAR Group

CAR Group's Payment Has Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. The last dividend made up a very large portion of earnings and also represented 88% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but it is still in a reasonable range to continue with.

Looking forward, earnings per share is forecast to rise by 22.0% over the next year. If the dividend continues on this path, the payout ratio could be 64% by next year, which we think can be pretty sustainable going forward.

CAR Group Has A Solid Track Record

The company has an extended history of paying stable dividends. The dividend has gone from an annual total of A$0.283 in 2014 to the most recent total annual payment of A$0.69. This implies that the company grew its distributions at a yearly rate of about 9.3% over that duration. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.

The Dividend's Growth Prospects Are Limited

Investors could be attracted to the stock based on the quality of its payment history. Earnings has been rising at 4.5% per annum over the last five years, which admittedly is a bit slow. CAR Group's earnings per share has barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. This isn't the end of the world, but for investors looking for strong dividend growth they may want to look elsewhere.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think CAR Group's payments are rock solid. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments CAR Group has been making. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 3 warning signs for CAR Group that investors should know about before committing capital to this stock. Is CAR Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.