First Merchants Corporation's (NASDAQ:FRME) periodic dividend will be increasing on the 21st of June to $0.35, with investors receiving 2.9% more than last year's $0.34. This makes the dividend yield about the same as the industry average at 3.8%.

Check out our latest analysis for First Merchants

First Merchants' Earnings Will Easily Cover The Distributions

We aren't too impressed by dividend yields unless they can be sustained over time.

Having distributed dividends for at least 10 years, First Merchants has a long history of paying out a part of its earnings to shareholders. Past distributions do not necessarily guarantee future ones, but First Merchants' payout ratio of 39% is a good sign as this means that earnings decently cover dividends.

The next year is set to see EPS grow by 0.2%. If the dividend continues along recent trends, we estimate the future payout ratio will be 45%, which is in the range that makes us comfortable with the sustainability of the dividend.

First Merchants 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 $0.20 in 2014 to the most recent total annual payment of $1.36. This implies that the company grew its distributions at a yearly rate of about 21% over that duration. Rapidly growing dividends for a long time is a very valuable feature for an income stock.

First Merchants May Find It Hard To Grow The Dividend

The company's investors will be pleased to have been receiving dividend income for some time. However, First Merchants' EPS was effectively flat over the past five years, which could stop the company from paying more every year. If First Merchants is struggling to find viable investments, it always has the option to increase its payout ratio to pay more to shareholders.

We Really Like First Merchants' Dividend

Overall, a dividend increase is always good, and we think that First Merchants is a strong income stock thanks to its track record and growing earnings. Earnings are easily covering distributions, and the company is generating plenty of cash. All of these factors considered, we think this has solid potential as a dividend stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 2 warning signs for First Merchants (1 shouldn't be ignored!) that you should be aware of before investing. 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.