Are Dividend Investors Getting More Than They Bargained For With Chemtrade Logistics Income Fund's (TSE:CHE.UN) Dividend?

Is Chemtrade Logistics Income Fund (TSE:CHE.UN) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

In this case, Chemtrade Logistics Income Fund likely looks attractive to investors, given its 8.9% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Remember though, due to the recent spike in its share price, Chemtrade Logistics Income Fund's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Click the interactive chart for our full dividend analysis

Payout ratios

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. While Chemtrade Logistics Income Fund pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Of the free cash flow it generated last year, Chemtrade Logistics Income Fund paid out 50% as dividends, suggesting the dividend is affordable.

Consider getting our latest analysis on Chemtrade Logistics Income Fund's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Chemtrade Logistics Income Fund's dividend payments. While its dividends have not been hugely volatile, its most recent dividend is still meaningfully below where it was 10 years ago. During the past 10-year period, the first annual payment was CA$1.2 in 2011, compared to CA$0.6 last year. This works out to be a decline of approximately 6.7% per year over that time.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

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. Over the past five years, it looks as though Chemtrade Logistics Income Fund's EPS have declined at around 36% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Chemtrade Logistics Income Fund's 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 not keen on the fact that Chemtrade Logistics Income Fund paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Second, earnings per share have actually shrunk, but at least the dividends have been relatively stable. Ultimately, Chemtrade Logistics Income Fund comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come accross 2 warning signs for Chemtrade Logistics Income Fund you should be aware of, and 1 of them is concerning.

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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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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