Diversified Royalty's (TSE:DIV) Dividend Will Be 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 August. This makes the dividend yield 8.3%, which will augment investor returns quite nicely.

View our latest analysis for Diversified Royalty

Diversified Royalty Is Paying Out More Than It Is Earning

A big dividend yield for a few years doesn't mean much if it 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.

Earnings per share could rise by 0.07% over the next year if things go the same way as they have for the last few years. Assuming the dividend continues along recent trends, we think the payout ratio could reach 220%, 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. The annual payment during the last 9 years was CA$0.188 in 2014, and the most recent fiscal year payment was CA$0.24. This implies that the company grew its distributions at a yearly rate of about 2.7% over that duration. 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.

The Dividend's Growth Prospects Are Limited

The company's investors will be pleased to have been receiving dividend income for some time. Diversified Royalty hasn't seen much change in its earnings per share over the last five years. The earnings growth is anaemic, and the company is paying out 186% of its profit. 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.

An additional note is that the company has been raising capital by issuing stock equal to 15% of shares outstanding in the last 12 months. 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.

Diversified Royalty's Dividend Doesn't Look Sustainable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The payments are bit high to be considered sustainable, and the track record isn't the best. We don't think Diversified Royalty is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 5 warning signs for Diversified Royalty you should be aware of, and 2 of them are a bit unpleasant. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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