Transurban Group (ASX:TCL) has announced that it will be increasing its periodic dividend on the 25th of February to A$0.32, which will be 6.7% higher than last year’s comparable payment amount of A$0.30. This makes the dividend yield 4.5%, which is above the industry average.

Check out our latest analysis for Transurban Group

Impressive dividend yields are good, but this doesn’t matter much if the payments can’t be sustained. Before making this announcement, the company’s dividend was much higher than its earnings. It will be difficult to sustain this level of payout so we wouldn’t be confident about this continuing.

Earnings per share is forecast to rise by 138.7% over the next year. If the dividend continues on its recent course, the company could be paying out several times what it earns in the next 12 months, which could start applying pressure to the balance sheet.

The company’s dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2014, the dividend has gone from A$0.35 total annually to A$0.62. This implies that the company grew its distributions at a yearly rate of about 5.9% over that duration. It’s good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Transurban Group might have put its house in order since then, but we remain cautious.

With a relatively unstable dividend, it’s even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. We are encouraged to see that Transurban Group has grown earnings per share at 9.6% per year over the past five years. While EPS is growing at a decent rate, but future growth could be limited by the amount of earnings being paid out to shareholders.

Overall, we always like to see the dividend being raised, but we don’t think Transurban Group will make a great income stock. In general, the distributions are a little bit higher than we would like, but we can’t ignore the fact the quickly growing earnings gives this stock great potential in the future. We would probably look elsewhere for an income investment.

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 picked out 2 warning signs for Transurban Group that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.