Plato Income Maximiser Limited (ASX:PL8) has announced that it will pay a dividend of A$0.0055 per share on the 29th of July. This makes the dividend yield 5.6%, which will augment investor returns quite nicely.

See our latest analysis for Plato Income Maximiser

Plato Income Maximiser's Earnings Easily Cover the Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, Plato Income Maximiser's dividend was only 45% of earnings, however it was paying out 147% of free cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

Over the next year, EPS could expand by 74.1% if recent trends continue. If the dividend continues along recent trends, we estimate the payout ratio will be 41%, which is in the range that makes us comfortable with the sustainability of the dividend.

Plato Income Maximiser's Dividend Has Lacked Consistency

It's comforting to see that Plato Income Maximiser has been paying a dividend for a number of years now, however it has been cut at least once in that time. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2017, the dividend has gone from A$0.054 total annually to A$0.066. This means that it has been growing its distributions at 4.1% per annum over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

The Dividend Looks Likely To Grow

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that Plato Income Maximiser has grown earnings per share at 74% per year over the past five years. The company's earnings per share has grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we think that Plato Income Maximiser could prove to be a strong dividend payer.

An additional note is that the company has been raising capital by issuing stock equal to 29% of shares outstanding in the last 12 months. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

In Summary

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. While Plato Income Maximiser is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.