Dominion Energy's Dividend: What's the Catch?

Dominion's Dividend: A 4.5% Yield Masking Deeper Instability?

Dominion Energy is set to pay a dividend of $0.6675 on December 20th, translating to a 4.5% yield. At first glance, that looks fairly standard for the industry. But the question isn't just the yield, it's the sustainability of that yield. And that's where things get a little murky.

Cracks in the Foundation: Payout Ratio and Cash Flow

The Simply Wall St. analysis points to a critical issue: Dominion's payout ratio. They're handing out a "fairly large proportion of earnings" as dividends, and even more concerning, they aren't generating positive free cash flow. This isn't a sustainable model. It's like robbing Peter to pay Paul, except Peter is future investment and Paul is the shareholder expecting a consistent check. How long can they keep that up? And what levers can they realistically pull to fix this?

Next year, EPS is projected to grow by 31.2%. If the dividend trajectory remains consistent (and that's a big "if"), the payout ratio could settle around 66%. That's "quite a comfortable range," according to the report. But projections are just that – projections. They’re not guarantees, especially in the volatile energy sector.

A History of Instability: Not a Great Sign for Income Seekers

Dominion's dividend history isn't exactly a smooth upward curve. There's been "at least one cut" in the last decade. Since 2015, the dividend has crept up from $2.40 to $2.67 annually. That's roughly 1.1% growth per year. Modest growth, sure, but overshadowed by those past cuts. It's hard to build a reliable income stream on that kind of volatility.

The report highlights that a consistent dividend policy is highly valued. This is, of course, true. But it raises a question: How much of Dominion's current stock price is propped up by investors chasing that 4.5% yield, regardless of the underlying financial health?

Growth vs. Sustainability: A Balancing Act

Earnings per share have been rising at a decent clip—12% per annum over the last five years. That's the good news. The less encouraging news is that with a high payout ratio already, there's limited room for dividend growth. The company is already stretching to maintain the current level.

I've looked at hundreds of these dividend reports, and the underlying tension is always the same: growth versus shareholder appeasement. Companies can either reinvest earnings for future expansion, or they can distribute them as dividends to keep investors happy. Dominion seems to be leaning heavily towards the latter, and that's a risky strategy in the long run.

The report concludes that the current dividend level "might be unsustainable." They don't outright dismiss Dominion as a potential dividend payer, acknowledging the healthy earnings growth. But the overall verdict is clear: if you're seeking reliable income, look elsewhere.

A Dividend Trap Waiting to Happen?

Simply Wall St. identifies a warning sign (they only specify one, which is odd). But the real warning sign is the combination of a high payout ratio, inconsistent dividend history, and reliance on projected earnings growth to justify the current payout. This smells like a classic dividend trap.