Insteel Industries Inc.'s (NYSE:IIIN) investors are due to receive a payment of $1.03 per share on 12th of December. This means the annual payment is 3.5% of the current stock price, which is above the average for the industry.

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If the payments aren't sustainable, a high yield for a few years won't matter that much. Based on the last payment, Insteel Industries was paying only paying out a fraction of earnings, but the payment was a massive 115% of cash flows. A cash payout ratio this high could put the dividend under pressure and force the company to reduce it in the future if it were to run into tough times.

Looking forward, earnings per share is forecast to rise by 75.2% over the next year. If the dividend continues on this path, the payout ratio could be 30% by next year, which we think can be pretty sustainable going forward.

See our latest analysis for Insteel Industries

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2015, the annual payment back then was $0.12, compared to the most recent full-year payment of $1.12. This works out to be a compound annual growth rate (CAGR) of approximately 25% a year over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Insteel Industries has impressed us by growing EPS at 16% per year over the past five years. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. 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. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 2 warning signs for Insteel Industries that investors should know about before committing capital to this stock. Is Insteel Industries not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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