Diversified Royalty (TSE:DIV) Is Due To Pay A Dividend Of CA$0.0208

Diversified Royalty Corp.'s (TSE:DIV) investors are due to receive a payment of CA$0.0208 per share on 30th of April. This means the annual payment is 8.6% of the current stock price, which is above the average for the industry.

Check out our latest analysis for Diversified Royalty

Diversified Royalty Is Paying Out More Than It Is Earning

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Based on the last payment, earnings were actually smaller than the dividend, and the company was actually spending more cash than it was making. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.

Over the next year, EPS could expand by 15.4% if the company continues along the path it has been on recently. Assuming the dividend continues along recent trends, we think the payout ratio could reach 114%, which probably can't continue without starting to put some pressure on the balance sheet.

Diversified Royalty Is Still Building Its Track Record

Diversified Royalty's dividend has been pretty stable for a little while now, but we will continue to be cautious until it has been demonstrated for a few more years. Since 2015, the dividend has gone from CA$0.188 total annually to CA$0.25. This works out to be a compound annual growth rate (CAGR) of approximately 3.2% a year over that time. We like that the dividend hasn't been shrinking. However we're conscious that the company hasn't got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.

Dividend Growth Could Be Constrained

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. We are encouraged to see that Diversified Royalty has grown earnings per share at 15% per year over the past five years. Although per-share earnings are growing at a credible rate, the massive payout ratio may limit growth in the company's future dividend payments.

We should note that Diversified Royalty has issued stock equal to 16% of shares outstanding. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Diversified Royalty's Dividend Doesn't Look Sustainable

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Diversified Royalty's payments, as there could be some issues with sustaining them into the future. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. This company is not in the top tier of income providing stocks.

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 identified 3 warning signs for Diversified Royalty (2 are significant!) that you should be aware of before investing. Is Diversified Royalty not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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