Could Granite Point Mortgage Trust Inc. (NYSE:GPMT) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
In this case, Granite Point Mortgage Trust pays a decent-sized 9.0% dividend yield, and has been distributing cash to shareholders for the past two years. A high yield probably looks enticing, but investors are likely wondering about the short payment history. There are a few simple ways to reduce the risks of buying Granite Point Mortgage Trust for its dividend, and we’ll go through these below.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Granite Point Mortgage Trust paid out 117% of its profit as dividends, over the trailing twelve month period. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. The dividend has not fluctuated much, but with a relatively short payment history, we can’t be sure this is sustainable across a full market cycle. During the past two-year period, the first annual payment was US$1.28 in 2017, compared to US$1.68 last year. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time.
The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. Granite Point Mortgage Trust’s earnings per share are up 13% on last year. It’s good to see earnings per share rising, but one year is too short a period to get excited about. Were this trend to continue, we’d be interested. With a payout ratio of 117%, Granite Point Mortgage Trust is paying out dividends substantially greater than what it earned in profit. We do note though, one year is too short a time to be drawing strong conclusions about a company’s future prospects.
We’d also point out that Granite Point Mortgage Trust issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, it’s not great to see how much of its earnings are being paid as dividends. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. In summary, we’re unenthused by Granite Point Mortgage Trust as a dividend stock. It’s not that we think it is a bad company; it simply falls short of our criteria in some key areas.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 3 Granite Point Mortgage Trust analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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