The board of Coventry Group Ltd (ASX:CYG) has announced that it will pay a dividend on the 13th of October, with investors receiving A$0.035 per share. This makes the dividend yield 2.9%, which will augment investor returns quite nicely.

See our latest analysis for Coventry Group

Coventry Group's Dividend Is Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, Coventry Group's dividend was higher than its profits, but the free cash flows quite comfortably covered it. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

According to analysts, EPS should be several times higher next year. If the dividend continues along recent trends, we estimate the payout ratio will be 33%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of A$0.22 in 2013 to the most recent total annual payment of A$0.035. This works out to a decline of approximately 84% over that time. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Coventry Group's Dividend Might Lack Growth

Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. Coventry Group has seen EPS rising for the last five years, at 70% per annum. EPS has been growing well, but Coventry Group has been paying out a massive proportion of its earnings, which can make the dividend tough to maintain.

Our Thoughts On Coventry Group's Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Coventry Group's payments, as there could be some issues with sustaining them into the future. 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. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 3 warning signs for Coventry Group that you should be aware of before investing. Is Coventry 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.