Healthcare Services Group, Inc. (NASDAQ:HCSG) will increase its dividend from last year's comparable payment on the 23rd of September to $0.2138. This will take the dividend yield to an attractive 6.1%, providing a nice boost to shareholder returns.

See our latest analysis for Healthcare Services Group

Healthcare Services Group Is Paying Out More Than It Is Earning

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Based on the last payment, earnings were actually smaller than the dividend, and the company was actually spending more cash than it was making. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.

Earnings per share is forecast to rise by 56.1% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 138%, which probably can't continue without putting some pressure on the balance sheet.

Healthcare Services Group Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from an annual total of $0.64 in 2012 to the most recent total annual payment of $0.855. This means that it has been growing its distributions at 2.9% per annum over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

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. Healthcare Services Group's EPS has fallen by approximately 19% per year during the past five years. 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. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.

Healthcare Services Group's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Healthcare Services Group will make a great income stock. Although they have been consistent in the past, we think the payments are a little high to be sustained. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. 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 3 warning signs for Healthcare Services Group (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.