The board of Diversified Royalty Corp. (TSE:DIV) has announced that it will pay a dividend of CA$0.0196 per share on the 30th of December. This makes the dividend yield 7.6%, which will augment investor returns quite nicely.
Diversified Royalty Doesn't Earn Enough To Cover Its Payments
A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, the company was paying out 96% of what it was earning. It will be difficult to sustain this level of payout so we wouldn't be confident about this continuing.
EPS is set to grow by 9.9% over the next year if recent trends continue. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 101% over the next year.
Diversified Royalty Is Still Building Its Track Record
It is great to see that Diversified Royalty has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. Since 2014, the annual payment back then was CA$0.188, compared to the most recent full-year payment of CA$0.235. This works out to be a compound annual growth rate (CAGR) of approximately 2.8% a year over that time. It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.
There Isn't Much Room To Grow The Dividend
The company's investors will be pleased to have been receiving dividend income for some time. It's encouraging to see that Diversified Royalty has been growing its earnings per share at 9.9% a year over the past five years. However, the payout ratio is very high, not leaving much room for growth of the dividend in the future.
We should note that Diversified Royalty has issued stock equal to 15% of shares outstanding. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
Diversified Royalty's Dividend Doesn't Look Sustainable
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. Strong earnings growth means Diversified Royalty has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. We would probably look elsewhere for an income investment.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Diversified Royalty has 3 warning signs (and 2 which are a bit unpleasant) 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.
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