Here's What You Should Know About Terra Firma Capital Corporation's (CVE:TII) 3.4% Dividend Yield

Is Terra Firma Capital Corporation (CVE:TII) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

Terra Firma Capital pays a 3.4% dividend yield, and has been paying dividends for the past two years. A high yield probably looks enticing, but investors are likely wondering about the short payment history. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

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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. In the last year, Terra Firma Capital paid out 38% of its profit as dividends. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

Consider getting our latest analysis on Terra Firma Capital'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. The company has been paying a stable dividend for a few years now, but we'd like to see more evidence of consistency over a longer period. During the past two-year period, the first annual payment was US$0.1 in 2019, compared to US$0.2 last year. This works out to be a compound annual growth rate (CAGR) of approximately 5.2% a year over that time.

Terra Firma Capital has been growing its dividend at a decent rate, and the payments have been stable despite the short payment history. This is a positive start.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Terra Firma Capital's EPS have fallen by approximately 13% 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 Terra Firma Capital's earnings per share, which support the dividend, have been anything but stable.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Firstly, we like that Terra Firma Capital has a low and conservative payout ratio. Earnings per share are down, and to our mind Terra Firma Capital has not been paying a dividend long enough to demonstrate its resilience across economic cycles. In summary, we're unenthused by Terra Firma Capital 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.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. To that end, Terra Firma Capital has 4 warning signs (and 1 which is significant) we think you should know about.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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