Could Nexus Real Estate Investment Trust (CVE:NXR.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. Yet sometimes, investors buy a popular dividend 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 7.8% yield, many investors probably find Nexus Real Estate Investment Trust intriguing. We'd agree the yield does look enticing. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Nexus Real Estate Investment Trust paid out 57% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. The company paid out 64% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Nexus Real Estate Investment Trust has available to meet other needs. It's positive to see that Nexus Real Estate Investment Trust's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
REITs like Nexus Real Estate Investment Trust often have different rules governing their distributions, so a higher payout ratio on its own is not unusual.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the data, we can see that Nexus 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. Its most recent annual dividend was CA$0.16 per share, effectively flat on its first payment six years ago.
It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Nexus Real Estate Investment Trust has grown its earnings per share at 5.6% per annum over the past five years. Earnings per share are growing at an acceptable rate, although the company is paying out more than half of its profits, which we think could constrain its ability to reinvest in its business.
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, we think Nexus Real Estate Investment Trust is paying out an acceptable percentage of its cashflow and profit. Second, earnings growth has been ordinary, and its history of dividend payments is shorter than we'd like. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Nexus Real Estate Investment Trust out there.
Now, if you want to look closer, it would be worth checking out our free research on Nexus Real Estate Investment Trust management tenure, salary, and performance.
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 firstname.lastname@example.org. 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.