The board of Cognizant Technology Solutions Corporation (NASDAQ:CTSH) has announced that it will be increasing its dividend by 13% on the 1st of March to US$0.27. The announced payment will take the dividend yield to 1.1%, which is in line with the average for the industry.

Check out our latest analysis for Cognizant Technology Solutions

Cognizant Technology Solutions' Earnings Easily Cover the Distributions

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. However, prior to this announcement, Cognizant Technology Solutions' dividend was comfortably covered by both cash flow and earnings. This means that most of what the business earns is being used to help it grow.

Looking forward, earnings per share is forecast to rise by 12.2% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 26%, which is in the range that makes us comfortable with the sustainability of the dividend.

Cognizant Technology Solutions Doesn't Have A Long Payment History

The dividend's track record has been pretty solid, but with only 5 years of history we want to see a few more years of history before making any solid conclusions. The dividend has gone from US$0.60 in 2017 to the most recent annual payment of US$0.96. This implies that the company grew its distributions at a yearly rate of about 9.9% over that duration. Cognizant Technology Solutions has a nice track record of dividend growth but we would wait until we see a longer track record before getting too confident.

We Could See Cognizant Technology Solutions' Dividend Growing

The company's investors will be pleased to have been receiving dividend income for some time. We are encouraged to see that Cognizant Technology Solutions has grown earnings per share at 9.7% per year over the past five years. A low payout ratio and decent growth suggests that the company is reinvesting well, and it also has plenty of room to increase the dividend over time.

We Really Like Cognizant Technology Solutions' Dividend

Overall, a dividend increase is always good, and we think that Cognizant Technology Solutions is a strong income stock thanks to its track record and growing earnings. The company is easily earning enough to cover its dividend payments and it is great to see that these earnings are being translated into cash flow. All in all, this checks a lot of the boxes we look for when choosing an income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for Cognizant Technology Solutions that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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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.