Is Dream Global Real Estate Investment Trust (TSE:DRG.UN) a good dividend stock? How would you know? A dividend paying company with growing earnings can be rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
With a eight-year payment history and a 5.8% yield, many investors probably find Dream Global Real Estate Investment Trust intriguing. It sure looks interesting on these metrics – but there’s always more to the story . There are a few simple ways to reduce the risks of buying Dream Global Real Estate Investment Trust for its dividend, and we’ll go through these below.Click the interactive chart for our full dividend analysis
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. 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, Dream Global Real Estate Investment Trust paid out 62% of its profit as dividends. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Dream Global Real Estate Investment Trust paid out 77% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances.
Dream Global Real Estate Investment Trust is a REIT, which is an investment structure that often has different payout rules compared to other companies. It is not uncommon for REITs to pay out 100% of their earnings each year.
Is Dream Global Real Estate Investment Trust’s Balance Sheet Risky?As Dream Global Real Estate Investment Trust has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks.
A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. Dream Global Real Estate Investment Trust has net debt of 8.27 times its earnings before interest, tax, depreciation and amortisation (EBITDA) which implies meaningful risk if interest rates rise of earnings decline.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. Net interest cover of 6.35 times its interest expense appears reasonable for Dream Global Real Estate Investment Trust, although we’re conscious that even high interest cover doesn’t make a company bulletproof. Despite a decent level of interest cover, we think that shareholders should remain cautious of the high level of net debt. Rising rates or tighter debt markets have a nasty habit of making fools of highly-indebted dividend stocks.
We update our data on Dream Global Real Estate Investment Trust every 24 hours, so you can always get our latest analysis of its financial health, here.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the last decade of data, we can see that Dream Global Real Estate Investment Trust 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$0.75 in 2011, compared to CA$0.80 last year. Its dividends have grown at less than 1% per annum over this time frame.
Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn’t want to rely on this dividend too much.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it’s also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient’s purchasing power. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Dream Global Real Estate Investment Trust has grown its earnings per share at 71% per annum over the past five years. Earnings per share are sharply up, but we wonder if paying out more than half its earnings (leaving less for reinvestment) is an implicit signal that Dream Global Real Estate Investment Trust’s growth will be slower in the future.
We’d also point out that Dream Global Real Estate Investment Trust issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental – it’s hard to grow dividends per share when new shares are regularly being created.
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. Dream Global Real Estate Investment Trust’s is paying out more than half its income as dividends, but at least the dividend is covered both by reported earnings and cashflow. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Dream Global Real Estate Investment Trust out there.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 3 Dream Global Real Estate Investment Trust analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.