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The board of Darden Restaurants, Inc. (NYSE:DRI) has announced that it will be paying its dividend of $1.21 on the 1st of November, an increased payment from last year's comparable dividend. This takes the dividend yield to 4.0%, which shareholders will be pleased with.
See our latest analysis for Darden Restaurants
Darden Restaurants' Dividend Is Well Covered By Earnings
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. The last dividend was quite easily covered by Darden Restaurants' earnings. This means that a large portion of its earnings are being retained to grow the business.
The next year is set to see EPS grow by 34.2%. Assuming the dividend continues along recent trends, we think the payout ratio could be 49% by next year, which is in a pretty sustainable range.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the dividend has gone from $1.72 total annually to $4.84. This means that it has been growing its distributions at 11% per annum over that time. Darden Restaurants 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.
The Dividend Looks Likely To Grow
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Darden Restaurants has impressed us by growing EPS at 14% per year over the past five years. Earnings are on the uptrend, and it is only paying a small portion of those earnings to shareholders.
We Really Like Darden Restaurants' Dividend
Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. Distributions are quite easily covered by earnings, which are also being converted to cash flows. All in all, this checks a lot of the boxes we look for when choosing an income stock.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 2 warning signs for Darden Restaurants that investors should know about before committing capital to this stock. Is Darden Restaurants not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.