Diversified Royalty (TSE:DIV) Will Pay A Dividend Of CA$0.02

Diversified Royalty Corp. (TSE:DIV) has announced that it will pay a dividend of CA$0.02 per share on the 31st of March. This makes the dividend yield 7.4%, which will augment investor returns quite nicely.

Check out our latest analysis for Diversified Royalty

Diversified Royalty Doesn't Earn Enough To Cover Its Payments

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, the company's dividend was much higher than its earnings. It will be difficult to sustain this level of payout so we wouldn't be confident about this continuing.

EPS is set to grow by 9.9% over the next year if recent trends continue. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 103% over the next year.

Diversified Royalty Doesn't Have A Long Payment History

It is great to see that Diversified Royalty has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. The dividend has gone from an annual total of CA$0.188 in 2015 to the most recent total annual payment of CA$0.24. This works out to be a compound annual growth rate (CAGR) of approximately 3.1% a year over that time. Diversified Royalty hasn't been paying a dividend for very long, so we wouldn't get to excited about its record of growth just yet.

Dividend Growth May Be Hard To Achieve

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. It's encouraging to see that Diversified Royalty has been growing its earnings per share at 9.9% a year over the past five years. However, the payout ratio is very high, not leaving much room for growth of the dividend in the future.

We should note that Diversified Royalty has issued stock equal to 15% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

The Dividend Could Prove To Be Unreliable

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 3 warning signs for Diversified Royalty (of which 2 are potentially serious!) you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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