Diversified Royalty's (TSE:DIV) Dividend Will Be CA$0.0208

The board of Diversified Royalty Corp. (TSE:DIV) has announced that it will pay a dividend of CA$0.0208 per share on the 31st of January. This makes the dividend yield 8.5%, which will augment investor returns quite nicely.

Check out our latest analysis for Diversified Royalty

Diversified Royalty's Projections Indicate Future Payments May Be Unsustainable

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, the dividend made up 122% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.

EPS is set to fall by 10.6% over the next 12 months. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 152%, which is definitely a bit high to be sustainable going forward.

Diversified Royalty Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2015, the annual payment back then was CA$0.188, compared to the most recent full-year payment of CA$0.25. This means that it has been growing its distributions at 2.9% per annum over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

Diversified Royalty's Dividend Might Lack Growth

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. We are encouraged to see that Diversified Royalty has grown earnings per share at 14% per year over the past five years. However, the company isn't reinvesting a lot back into the business, so we would expect the growth rate to slow down somewhat in the future.

An additional note is that the company has been raising capital by issuing stock equal to 16% 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

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. Although they have been consistent in the past, we think the payments are a little high to be sustained. 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. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Diversified Royalty has 3 warning signs (and 2 which are potentially serious) 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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