The board of The Toronto-Dominion Bank (TSE:TD) has announced that it will be increasing its dividend by 2.9% on the 31st of January to CA$1.05, up from last year's comparable payment of CA$1.02. Based on this payment, the dividend yield for the company will be 5.6%, which is fairly typical for the industry.

View our latest analysis for Toronto-Dominion Bank

Toronto-Dominion Bank's Dividend Forecasted To Be Well Covered By Earnings

Solid dividend yields are great, but they only really help us if the payment is sustainable.

Having distributed dividends for at least 10 years, Toronto-Dominion Bank has a long history of paying out a part of its earnings to shareholders. Past distributions do not necessarily guarantee future ones, but Toronto-Dominion Bank's payout ratio of 93% is a good sign as this means that earnings decently cover dividends.

Looking forward, EPS is forecast to rise by 55.5% over the next 3 years. For the same time horizon, analysts estimate that the future payout ratio could be 53% which would be quite comfortable going to take the dividend forward.

Toronto-Dominion Bank Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2014, the dividend has gone from CA$1.88 total annually to CA$4.08. This implies that the company grew its distributions at a yearly rate of about 8.1% over that duration. Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination as it provides a nice boost to shareholder returns.

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. Unfortunately things aren't as good as they seem. In the last five years, Toronto-Dominion Bank's earnings per share has shrunk at approximately 4.2% per annum. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Toronto-Dominion Bank's payments are rock solid. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We don't think Toronto-Dominion Bank is a great stock to add to your portfolio if income is your focus.