NZME Limited (NZSE:NZM) will pay a dividend of NZ$0.0353 on the 25th of September. Based on this payment, the dividend yield on the company's stock will be 9.3%, which is an attractive boost to shareholder returns.

Check out our latest analysis for NZME

NZME Doesn't Earn Enough To Cover Its Payments

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, NZME's dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

Earnings per share is forecast to rise by 60.9% over the next year. If the dividend continues on its recent course, the payout ratio in 12 months could be 106%, which is a bit high and could start applying pressure to the balance sheet.

NZME's Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. This suggests that the dividend might not be the most reliable. The annual payment during the last 8 years was NZ$0.07 in 2016, and the most recent fiscal year payment was NZ$0.09. This works out to be a compound annual growth rate (CAGR) of approximately 3.2% a year over that time. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

Dividend Growth May Be Hard To Achieve

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that NZME has been growing its earnings per share at 6.8% a year over the past five years. While EPS is growing at a decent rate, but future growth could be limited by the amount of earnings being paid out to shareholders.

Our Thoughts On NZME's Dividend

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for NZME that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.