Do Investors Have Good Reason To Be Wary Of Reef Casino Trust's (ASX:RCT) 3.9% Dividend Yield?

Could Reef Casino Trust (ASX:RCT) 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.

A high yield and a long history of paying dividends is an appealing combination for Reef Casino Trust. We'd guess that plenty of investors have purchased it for the income. Some simple research can reduce the risk of buying Reef Casino Trust for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

Payout ratios

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. While Reef Casino Trust pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

The company paid out 78% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn.

While the above analysis focuses on dividends relative to a company's earnings, we do note Reef Casino Trust's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on Reef Casino Trust's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of Reef Casino Trust's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was AU$0.2 in 2011, compared to AU$0.1 last year. This works out to be a decline of approximately 7.8% per year over that time. Reef Casino Trust's dividend hasn't shrunk linearly at 7.8% per annum, but the CAGR is a useful estimate of the historical rate of change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Reef Casino Trust's EPS have fallen by approximately 55% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Reef Casino Trust's earnings per share, which support the dividend, have been anything but stable.

Conclusion

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. We're not keen on the fact that Reef Casino Trust paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. There are a few too many issues for us to get comfortable with Reef Casino Trust from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come accross 3 warning signs for Reef Casino Trust you should be aware of, and 1 of them is significant.

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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This article by Simply Wall St is general in nature. 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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