Deluxe Corporation (NYSE:DLX) has announced that it will pay a dividend of $0.30 per share on the 3rd of June. This means the annual payment is 5.6% of the current stock price, which is above the average for the industry.

View our latest analysis for Deluxe

Deluxe Doesn't Earn Enough To Cover Its Payments

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, the company was paying out 154% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 39%. 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.

Over the next year, EPS is forecast to expand by 42.5%. If the dividend continues on its recent course, the payout ratio in 12 months could be 110%, which is a bit high and could start applying pressure to the balance sheet.

Deluxe Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2014, the annual payment back then was $1.00, compared to the most recent full-year payment of $1.20. This implies that the company grew its distributions at a yearly rate of about 1.8% over that duration. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

Dividend Growth Potential Is Shaky

Investors could be attracted to the stock based on the quality of its payment history. Let's not jump to conclusions as things might not be as good as they appear on the surface. Over the past five years, it looks as though Deluxe's EPS has declined at around 22% a year. 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. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.

In Summary

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The company has been bring in plenty of cash to cover the dividend, but we don't necessarily think that makes it a great dividend stock. We don't think Deluxe is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic 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 identified 4 warning signs for Deluxe (1 is a bit concerning!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield 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.