It Might Not Be A Great Idea To Buy Diversified Royalty Corp. (TSE:DIV) For Its Next Dividend

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 one business day 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Diversified Royalty's shares before the 13th of November in order to be eligible for the dividend, which will be paid on the 30th of November.

The company's next dividend payment will be CA$0.02375 per share, and in the last 12 months, the company paid a total of CA$0.28 per share. Based on the last year's worth of payments, Diversified Royalty has a trailing yield of 7.0% on the current stock price of CA$4.07. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Diversified Royalty has been able to grow its dividends, or if the dividend might be cut.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Diversified Royalty distributed an unsustainably high 171% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Diversified Royalty paid out more free cash flow than it generated - 172%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given Diversified Royalty's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

View 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 with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Diversified Royalty's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. With slack earnings growth and paying out substantially more than it reported in profit last year, this dividend is potentially at risk of being cut.

Diversified Royalty also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Diversified Royalty has delivered 2.5% dividend growth per year on average over the past 10 years.

To Sum It Up

Should investors buy Diversified Royalty for the upcoming dividend? Earnings per share are effectively flat, plus Diversified Royalty's dividend is not well covered by either earnings or cash flow, which is not great. Bottom line: Diversified Royalty has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Diversified Royalty and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 4 warning signs for Diversified Royalty that we strongly recommend you have a look at before investing in the company.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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