Dividend paying stocks like TOC Property Backed Lending Trust Plc (LON:PBLT) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
TOC Property Backed Lending Trust pays a 5.8% dividend yield, and has been paying dividends for the past three years. A 5.8% yield does look good. Could the short payment history hint at future dividend growth? When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
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. Looking at the data, we can see that 227% of TOC Property Backed Lending Trust’s profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
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. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we’re not ready to live on. Its most recent annual dividend was UK£0.06 per share, effectively flat on its first payment three years ago.
We’re glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don’t think this is an attractive combination.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to evaluate if earnings per share (EPS) are growing – it’s not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. It’s not great to see that TOC Property Backed Lending Trust’s have fallen at approximately 7.2% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.
We’d also point out that TOC Property Backed Lending Trust issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental – it’s hard to grow dividends per share when new shares are regularly being created.
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. TOC Property Backed Lending Trust is paying out a larger percentage of its profit than we’re comfortable with. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In short, we’re not keen on TOC Property Backed Lending Trust from a dividend perspective. Businesses can change, but we’ve spotted a few too many concerns with this one to get comfortable.
Now, if you want to look closer, it would be worth checking out our free research on TOC Property Backed Lending Trust management tenure, salary, and performance.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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