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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Diversified Royalty Corp. (TSE:DIV) is about to go ex-dividend in just 4 days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Meaning, you will need to purchase Diversified Royalty's shares before the 15th of May to receive the dividend, which will be paid on the 30th of May.
The company's next dividend payment will be CA$0.02083 per share. Last year, in total, the company distributed CA$0.25 to shareholders. Calculating the last year's worth of payments shows that Diversified Royalty has a trailing yield of 8.6% on the current share price of CA$2.92. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Diversified Royalty distributed an unsustainably high 152% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Diversified Royalty generated enough free cash flow to afford its dividend. Dividends consumed 75% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Diversified Royalty fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
See our latest analysis for Diversified Royalty
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Diversified Royalty, with earnings per share up 4.0% on average over the last five years.