Should You Or Shouldn't You: A Dividend Analysis on Gold Road Resources Limited (ASX:GOR)

Today we'll take a closer look at Gold Road Resources Limited (ASX:GOR) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

Some simple research can reduce the risk of buying Gold Road Resources for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Gold Road Resources!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Gold Road Resources paid out 16% of its profit as dividends, over the trailing twelve month period. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.

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

Consider getting our latest analysis on Gold Road Resources' 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. With a payment history of less than 2 years, we think it's a bit too soon to think about living on the income from its dividend. Its most recent annual dividend was AU$0.01 per share.

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.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Gold Road Resources' EPS have fallen by approximately 23% 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 Gold Road Resources' 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 glad to see Gold Road Resources has a low payout ratio, as this suggests earnings are being reinvested in the business. Earnings per share are down, and to our mind Gold Road Resources has not been paying a dividend long enough to demonstrate its resilience across economic cycles. Gold Road Resources might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 1 warning sign for Gold Road Resources that investors should take into consideration.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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