Is Imperial Equities Inc. (CVE:IEI) A Good Fit For Your Dividend Portfolio?

Today we'll take a closer look at Imperial Equities Inc. (CVE:IEI) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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 1.6% yield and a eight-year payment history, investors probably think Imperial Equities 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. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis

Payout ratios

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. Imperial Equities paid out 33% of its profit as dividends, over the trailing twelve month period. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Plus, there is room to increase the payout ratio 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. Imperial Equities paid out 4.9% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's positive to see that Imperial Equities' 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 Imperial Equities every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

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. The first recorded dividend for Imperial Equities, in the last decade, was eight years ago. It's good to see that Imperial Equities has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past eight-year period, the first annual payment was CA$0.1 in 2012, compared to CA$0.06 last year. This works out to be a decline of approximately 6.2% per year over that time. Imperial Equities' dividend hasn't shrunk linearly at 6.2% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Imperial Equities for its dividend, given that payments have shrunk over the past eight years.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Imperial Equities' earnings per share have shrunk at 26% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Imperial Equities' earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Imperial Equities' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's great to see that Imperial Equities is paying out a low percentage of its earnings and cash flow. Earnings per share are down, and Imperial Equities' dividend has been cut at least once in the past, which is disappointing. Ultimately, Imperial Equities 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.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 6 warning signs for Imperial Equities (of which 2 are significant!) you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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