The board of Keurig Dr Pepper Inc. (NASDAQ:KDP) has announced that the dividend on 14th of October will be increased to $0.20, which will be 6.7% higher than last year's payment of $0.188 which covered the same period. Although the dividend is now higher, the yield is only 2.0%, which is below the industry average.

See our latest analysis for Keurig Dr Pepper

Keurig Dr Pepper's Earnings Easily Cover The Distributions

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Based on the last payment, Keurig Dr Pepper was quite comfortably earning enough to cover the dividend. This means that a large portion of its earnings are being retained to grow the business.

Looking forward, earnings per share is forecast to rise by 32.8% over the next year. If the dividend continues on this path, the payout ratio could be 34% by next year, which we think can be pretty sustainable going forward.

Keurig Dr Pepper Doesn't Have A Long Payment History

The dividend has been pretty stable looking back, but the company hasn't been paying one for very long. This makes it tough to judge how it would fare through a full economic cycle. Since 2018, the annual payment back then was $0.60, compared to the most recent full-year payment of $0.75. This means that it has been growing its distributions at 5.7% per annum over that time. Keurig Dr Pepper has a nice track record of dividend growth but we would wait until we see a longer track record before getting too confident.

The Dividend Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. It's encouraging to see that Keurig Dr Pepper has been growing its earnings per share at 26% a year over the past five years. The company doesn't have any problems growing, despite returning a lot of capital to shareholders, which is a very nice combination for a dividend stock to have.

We Really Like Keurig Dr Pepper's Dividend

In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. The company is easily earning enough to cover its dividend payments and it is great to see that these earnings are being translated into cash flow. All of these factors considered, we think this has solid potential as a dividend stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 3 warning signs for Keurig Dr Pepper that investors should take into consideration. Is Keurig Dr Pepper not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.