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

The board of Diversified Royalty Corp. (TSE:DIV) has announced that it will pay a dividend of CA$0.02 per share on the 31st of July. This means the annual payment is 8.5% of the current stock price, which is above the average for the industry.

View 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 this announcement, Diversified Royalty was paying out 186% of what it was earning, and not generating any free cash flows either. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.

Over the next year, EPS could expand by 0.09% if the company continues along the path it has been on recently. If the dividend continues on its recent course, the payout ratio in 12 months could be 218%, which is a bit high and could start applying pressure to the balance sheet.

Diversified Royalty Is Still Building Its Track Record

Even though the company has been paying a consistent dividend for a while, we would like to see a few more years before we feel comfortable relying on it. Since 2014, the annual payment back then was CA$0.188, compared to the most recent full-year payment of CA$0.24. This works out to be a compound annual growth rate (CAGR) of approximately 2.7% a year over that time. It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.

The Dividend's Growth Prospects Are Limited

The company's investors will be pleased to have been receiving dividend income for some time. Unfortunately, Diversified Royalty's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. The earnings growth is anaemic, and the company is paying out 186% of its profit. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.

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

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. The track record isn't great, and the payments are a bit high to be considered sustainable. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. Just as an example, we've come across 5 warning signs for Diversified Royalty you should be aware of, and 2 of them don't sit too well with us. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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