Here's Why We're Wary Of Buying Source Rock Royalties' (CVE:SRR) For Its Upcoming Dividend

Source Rock Royalties Ltd. (CVE:SRR) stock is about to trade ex-dividend in 4 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Source Rock Royalties' shares on or after the 31st of May will not receive the dividend, which will be paid on the 14th of June.

The company's next dividend payment will be CA$0.0065 per share, and in the last 12 months, the company paid a total of CA$0.072 per share. Looking at the last 12 months of distributions, Source Rock Royalties has a trailing yield of approximately 8.9% on its current stock price of CA$0.88. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Source Rock Royalties

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Source Rock Royalties distributed an unsustainably high 190% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend.

It's good to see that while Source Rock Royalties's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Source Rock Royalties paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Source Rock Royalties's earnings per share have risen 19% per annum over the last five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Source Rock Royalties has delivered 14% dividend growth per year on average over the past two years. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

Is Source Rock Royalties worth buying for its dividend? While it's nice to see earnings per share growing, we're curious about how Source Rock Royalties intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Source Rock Royalties.

Although, if you're still interested in Source Rock Royalties and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 5 warning signs for Source Rock Royalties (2 are a bit unpleasant) you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.