Dividend Investors: Don't Be Too Quick To Buy The Keg Royalties Income Fund (TSE:KEG.UN) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see The Keg Royalties Income Fund (TSE:KEG.UN) is about to trade ex-dividend in the next 4 days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Keg Royalties Income Fund's shares before the 21st of March in order to be eligible for the dividend, which will be paid on the 31st of March.

The company's next dividend payment will be CA$0.0946 per share. Last year, in total, the company distributed CA$1.14 to shareholders. Last year's total dividend payments show that Keg Royalties Income Fund has a trailing yield of 8.2% on the current share price of CA$13.88. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Keg Royalties Income Fund

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Keg Royalties Income Fund distributed an unsustainably high 153% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Keg Royalties Income Fund generated enough free cash flow to afford its dividend. Fortunately, it paid out only 50% of its free cash flow in the past year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Keg Royalties Income Fund fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Keg Royalties Income Fund paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Keg Royalties Income Fund's 13% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Keg Royalties Income Fund has lifted its dividend by approximately 1.7% a year on average.

The Bottom Line

From a dividend perspective, should investors buy or avoid Keg Royalties Income Fund? It's never great to see earnings per share declining, especially when a company is paying out 153% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not that we think Keg Royalties Income Fund is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Keg Royalties Income Fund as an investment, you'll find it beneficial to know what risks this stock is facing. For instance, we've identified 4 warning signs for Keg Royalties Income Fund (2 make us uncomfortable) you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.