Rattler Midstream LP (NASDAQ:RTLR) has announced that it will be increasing its dividend on the 22nd of November to US$0.25. This will take the dividend yield from 7.1% to 8.0%, providing a nice boost to shareholder returns.

Check out our latest analysis for Rattler Midstream

Rattler Midstream Is Paying Out More Than It Is Earning

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, the company was paying out 109% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 58%. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.

Earnings per share is forecast to rise by 55.1% over the next year. However, if the dividend continues growing along recent trends, it could start putting pressure on the balance sheet with the payout ratio getting very high over the next year.

Rattler Midstream's Dividend Has Lacked Consistency

The track record isn't the longest, but we are already seeing a bit of instability in the payments. Since 2019, the dividend has gone from US$1.00 to US$0.80. This works out to a decline of approximately 20% over that time. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

Rattler Midstream May Find It Hard To Grow The Dividend

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Rattler Midstream's earnings per share is up 3.2% over the past year. Rising earnings will make it easier for the company to keep paying dividends, and possibly even increase them. So the company has struggled to grow its EPS yet it's still paying out 109% of its earnings. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade. However, we would never make any decisions based on only a single year of data, especially when assessing long term dividend potential.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Rattler Midstream's payments are rock solid. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We don't think Rattler Midstream is a great stock to add to your portfolio if income is your focus.