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Is Choice Properties Real Estate Investment Trust (TSE:CHP.UN) A Smart Pick For Income Investors?

Simply Wall St

Could Choice Properties Real Estate Investment Trust (TSE:CHP.UN) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a six-year payment history and a 5.5% yield, many investors probably find Choice Properties Real Estate Investment Trust intriguing. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Choice Properties Real Estate Investment Trust for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

TSX:CHP.UN Historical Dividend Yield, November 9th 2019

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. While Choice Properties Real Estate Investment Trust pays a dividend, it reported a loss over the last year. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

Choice Properties Real Estate Investment Trust's cash payout ratio last year was 25%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout.

Choice Properties Real Estate Investment Trust is a REIT, which is an investment structure that often has different payout rules compared to other companies. It is not uncommon for REITs to pay out 100% of their earnings each year.

Is Choice Properties Real Estate Investment Trust's Balance Sheet Risky?

As Choice Properties Real Estate Investment Trust has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. With a net debt to EBITDA ratio of 11.91 times, Choice Properties Real Estate Investment Trust is very highly levered. While this debt might be serviceable, we would still say it carries substantial risk for the investor who hopes to live on the dividend.

Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. Interest cover of 1.89 times its interest expense is starting to become a concern for Choice Properties Real Estate Investment Trust, and be aware that lenders may place additional restrictions on the company as well. High debt and weak interest cover are not a great combo, and we would be cautious of relying on this company's dividend while these metrics persist. That said, Choice Properties Real Estate Investment Trust is in the real estate business, which is typically able to sustain much higher levels of debt, relative to other industries.

Consider getting our latest analysis on Choice Properties Real Estate Investment Trust's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Choice Properties Real Estate Investment Trust has been paying a dividend for the past six years. The company has been paying a stable dividend for a while now, which is great. However we'd prefer to see consistency for a few more years before giving it our full seal of approval. During the past six-year period, the first annual payment was CA$0.65 in 2013, compared to CA$0.74 last year. This works out to be a compound annual growth rate (CAGR) of approximately 2.2% a year over that time.

Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn't want to rely on this dividend too much.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It's good to see Choice Properties Real Estate Investment Trust has been growing its earnings per share at 17% a year over the past five years. Earnings per share have been growing at a good rate, and the company is paying less than half its earnings as dividends. We generally think this is an attractive combination, as it permits further reinvestment in the business.

We'd also point out that Choice Properties Real Estate Investment Trust issued a meaningful number of new shares in the past year. 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.

Conclusion

To summarise, shareholders should always check that Choice Properties Real Estate Investment Trust's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's great to see that Choice Properties Real Estate Investment Trust is paying out a low percentage of its earnings and cash flow. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. Choice Properties Real Estate Investment Trust performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Choice Properties Real Estate Investment Trust stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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.