Diversified Royalty (TSE:DIV) Will Pay A Larger Dividend Than Last Year At CA$0.0204

The board of Diversified Royalty Corp. (TSE:DIV) has announced that it will be paying its dividend of CA$0.0204 on the 30th of November, an increased payment from last year's comparable dividend. This will take the dividend yield to an attractive 9.3%, providing a nice boost to shareholder returns.

See 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. Before this announcement, Diversified Royalty was paying out 175% of what it was earning, and not generating any free cash flows either. This high of a dividend payment could start to put pressure on the balance sheet in the future.

Earnings per share is forecast to rise by 52.1% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 131%, which probably can't continue without putting some pressure on the balance sheet.

Diversified Royalty Doesn't Have A Long Payment History

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 dividend has gone from CA$0.188 total annually to CA$0.24. This implies that the company grew its distributions at a yearly rate of about 2.7% over that duration. 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.

Dividend Growth May Be Hard To Achieve

Investors could be attracted to the stock based on the quality of its payment history. 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 company is paying out a lot of its profits, even though it is growing those profits pretty slowly. Limited recent earnings growth and a high payout ratio makes it hard for us to envision strong future dividend growth, unless the company should have substantial pricing power or some form of competitive advantage.

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 always good to see the dividend being raised, we don't think Diversified Royalty's payments are rock solid. The track record isn't great, and the payments are a bit high to be considered sustainable. We don't think Diversified Royalty is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Diversified Royalty has 5 warning signs (and 2 which are significant) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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