The board of NVE Corporation (NASDAQ:NVEC) has announced that it will pay a dividend on the 31st of August, with investors receiving $1.00 per share. Based on this payment, the dividend yield on the company's stock will be 7.8%, which is an attractive boost to shareholder returns.

Check out our latest analysis for NVE

NVE Is Paying Out More Than It Is Earning

A big dividend yield for a few years doesn't mean much if it can't be sustained. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.

Over the next year, EPS could expand by 2.8% if the company continues along the path it has been on recently. If the dividend continues on its recent course, the payout ratio in 12 months could be 124%, which is a bit high and could start applying pressure to the balance sheet.

NVE Doesn't Have A Long Payment History

The dividend's track record has been pretty solid, but with only 7 years of history we want to see a few more years of history before making any solid conclusions. The last annual payment of $4.00 was flat on the annual payment from7 years ago. We like that the dividend hasn't been shrinking. However we're conscious that the company hasn't got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.

The Dividend's Growth Prospects Are Limited

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Earnings per share has been crawling upwards at 2.8% per year. The earnings growth is anaemic, and the company is paying out 128% of its profit. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.

The Dividend Could Prove To Be Unreliable

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about NVE's payments, as there could be some issues with sustaining them into the future. The payments are bit high to be considered sustainable, and the track record isn't the best. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. Taking the debate a bit further, we've identified 2 warning signs for NVE that investors need to be conscious of moving forward. Is NVE not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.