Is Rights and Issues Investment Trust Public Limited Company (LON:RIII) A Strong Dividend Stock?

Is Rights and Issues Investment Trust Public Limited Company (LON:RIII) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

While Rights and Issues Investment Trust's 1.6% dividend yield is not the highest, we think its lengthy payment history is quite interesting. The company also bought back stock equivalent to around 3.9% of market capitalisation this year. Some simple analysis can reduce the risk of holding Rights and Issues Investment Trust for its dividend, and we'll focus on the most important aspects below.

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Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. While Rights and Issues Investment Trust pays a dividend, it reported a loss over the last year. When a loss-making financial company pays a dividend, the dividend is not being paid out of profit, which is a concern if the company can't return to operating profitably.

Consider getting our latest analysis on Rights and Issues Investment Trust's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of Rights and Issues Investment Trust's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was UK£0.3 in 2011, compared to UK£0.3 last year. Dividends per share have grown at approximately 2.4% per year over this time. The dividends haven't grown at precisely 2.4% every year, but this is a useful way to average out the historical rate of growth.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though Rights and Issues Investment Trust's EPS have declined at around 60% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Rights and Issues Investment Trust is paying out a dividend despite reporting a loss; clearly a concern. Earnings per share are down, and Rights and Issues Investment Trust's dividend has been cut at least once in the past, which is disappointing. With any dividend stock, we look for a sustainable payout ratio, steady dividends, and growing earnings. Rights and Issues Investment Trust has a few too many issues for us to get interested.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 3 warning signs for Rights and Issues Investment Trust (of which 2 are a bit unpleasant!) you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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