Barratt Developments plc (LON:BDEV) will increase its dividend from last year's comparable payment on the 4th of November to £0.257. The payment will take the dividend yield to 8.7%, which is in line with the average for the industry.

Check out our latest analysis for Barratt Developments

Barratt Developments' Dividend Is Well Covered By Earnings

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. At the time of the last dividend payment, Barratt Developments was paying out a very large proportion of what it was earning and 97% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

The next year is set to see EPS grow by 30.4%. If the dividend continues along recent trends, we estimate the payout ratio will be 59%, which is in the range that makes us comfortable with the sustainability of the dividend.

Barratt Developments' Dividend Has Lacked Consistency

Barratt Developments has been paying dividends for a while, but the track record isn't stellar. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The dividend has gone from an annual total of £0.025 in 2013 to the most recent total annual payment of £0.369. This means that it has been growing its distributions at 35% per annum over that time. Barratt Developments has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Dividend Growth May Be Hard To Achieve

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Barratt Developments has seen earnings per share falling at 3.8% per year over the last five years. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

Barratt Developments' Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Barratt Developments will make a great income stock. While Barratt Developments is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 2 warning signs for Barratt Developments that you should be aware of before investing. Is Barratt Developments not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.