Dividend paying stocks like TerraVest Industries Inc. (TSE:TVK) 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.
With a 2.3% yield and a eight-year payment history, investors probably think TerraVest Industries looks like a reliable dividend stock. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. The company also bought back stock equivalent to around 1.2% of market capitalisation this year. Some simple research can reduce the risk of buying TerraVest Industries for its dividend - read on to learn more.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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. In the last year, TerraVest Industries paid out 23% of its profit as dividends. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. TerraVest Industries' cash payout ratio last year was 14%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that TerraVest Industries' dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
We update our data on TerraVest Industries every 24 hours, so you can always get our latest analysis of its financial health, here.
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. Looking at the last decade of data, we can see that TerraVest Industries paid its first dividend at least eight years ago. The company has been paying a stable dividend for a while now, which is great. However we'd prefer to see consistency for a few more years before giving it our full seal of approval. During the past eight-year period, the first annual payment was CA$0.3 in 2013, compared to CA$0.4 last year. Dividends per share have grown at approximately 2.8% per year over this time.
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
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see TerraVest Industries has grown its earnings per share at 16% per annum over the past five years. Earnings per share are growing at a solid clip, and the payout ratio is low. We think this is an ideal combination in a dividend stock.
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. It's great to see that TerraVest Industries is paying out a low percentage of its earnings and cash flow. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. Overall we think TerraVest Industries scores well on our analysis. It's not quite perfect, but we'd definitely be keen to take a closer look.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 3 warning signs for TerraVest Industries that investors should know about before committing capital to this stock.
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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