The board of GFM Services Berhad (KLSE:GFM) has announced that it will pay a dividend of MYR0.0025 per share on the 24th of July. This will take the dividend yield to an attractive 3.6%, providing a nice boost to shareholder returns.

Check out our latest analysis for GFM Services Berhad

GFM Services Berhad's Dividend Is Well Covered By Earnings

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, GFM Services Berhad was easily earning enough to cover the dividend. As a result, a large proportion of what it earned was being reinvested back into the business.

Looking forward, EPS could fall by 6.8% if the company can't turn things around from the last few years. Assuming the dividend continues along recent trends, we believe the payout ratio could be 40%, which we are pretty comfortable with and we think is feasible on an earnings basis.

GFM Services Berhad's Dividend Has Lacked Consistency

GFM Services Berhad 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. Since 2017, the dividend has gone from MYR0.0145 total annually to MYR0.0154. Its dividends have grown at less than 1% per annum over this time frame. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Dividend Growth May Be Hard To Come By

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. In the last five years, GFM Services Berhad's earnings per share has shrunk at approximately 6.8% per annum. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.

Our Thoughts On GFM Services Berhad's Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 4 warning signs for GFM Services Berhad (of which 1 shouldn't be ignored!) you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.