Xcel Energy's (NASDAQ:XEL) Upcoming Dividend Will Be Larger Than Last Year's

Xcel Energy Inc. (NASDAQ:XEL) will increase its dividend on the 20th of July to US$0.49. The announced payment will take the dividend yield to 2.5%, which is in line with the average for the industry.

See our latest analysis for Xcel Energy

Xcel Energy's Earnings Easily Cover the Distributions

Solid dividend yields are great, but they only really help us if the payment is sustainable. Before making this announcement, Xcel Energy was earning enough to cover the dividend, but it wasn't generating any free cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

The next year is set to see EPS grow by 8.0%. If the dividend continues along recent trends, we estimate the payout ratio will be 63%, which is in the range that makes us comfortable with the sustainability of the dividend.

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Xcel Energy Has A Solid Track Record

The company has an extended history of paying stable dividends. The first annual payment during the last 10 years was US$1.04 in 2012, and the most recent fiscal year payment was US$1.95. This implies that the company grew its distributions at a yearly rate of about 6.5% 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.

Xcel Energy Could Grow Its Dividend

Investors could be attracted to the stock based on the quality of its payment history. Xcel Energy has impressed us by growing EPS at 6.1% per year over the past five years. The lack of cash flows does make us a bit cautious though, especially when it comes to the future of the dividend.

Our Thoughts On Xcel Energy's Dividend

Overall, we always like to see the dividend being raised, but we don't think Xcel Energy will make a great income stock. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. 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. However, there are other things to consider for investors when analysing stock performance. To that end, Xcel Energy has 3 warning signs (and 1 which is a bit concerning) we think you should know about. 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.