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Do These 3 Checks Before Buying RioCan Real Estate Investment Trust (TSE:REI.UN) For Its Upcoming Dividend

Simply Wall St

It looks like RioCan Real Estate Investment Trust (TSE:REI.UN) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 30th of July in order to be eligible for this dividend, which will be paid on the 8th of August.

RioCan Real Estate Investment Trust's upcoming dividend is CA$0.12 a share, following on from the last 12 months, when the company distributed a total of CA$1.44 per share to shareholders. Looking at the last 12 months of distributions, RioCan Real Estate Investment Trust has a trailing yield of approximately 5.5% on its current stock price of CA$26.25. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether RioCan Real Estate Investment Trust can afford its dividend, and if the dividend could grow.

Check out our latest analysis for RioCan Real Estate Investment Trust

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. It paid out 78% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. That said, REITs are often required by law to distribute all of their earnings, and it's not unusual to see a REIT with a payout ratio around 100%. We wouldn't read too much into this. 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. RioCan Real Estate Investment Trust paid out more free cash flow than it generated - 112%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

While RioCan Real Estate Investment Trust's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were RioCan Real Estate Investment Trust to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit RioCan Real Estate Investment Trust paid out over the last 12 months.

TSX:REI.UN Historical Dividend Yield, July 25th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. So we're not too excited that RioCan Real Estate Investment Trust's earnings are down 3.9% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. RioCan Real Estate Investment Trust has delivered 0.6% dividend growth per year on average over the past 10 years.

To Sum It Up

Should investors buy RioCan Real Estate Investment Trust for the upcoming dividend? RioCan Real Estate Investment Trust had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Want to learn more about RioCan Real Estate Investment Trust's dividend performance? Check out this visualisation of its historical revenue and earnings growth.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.