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Is Deutsche Wohnen SE (ETR:DWNI) The Right Choice For A Smart Dividend Investor?

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Today we'll take a closer look at Deutsche Wohnen SE (ETR:DWNI) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

Investors might not know much about Deutsche Wohnen's dividend prospects, even though it has been paying dividends for the last nine years and offers a 2.7% yield. While the yield may not look too great, the relatively long payment history is interesting. During the year, the company also conducted a buyback equivalent to around 0.8% of its market capitalisation. Some simple research can reduce the risk of buying Deutsche Wohnen for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Deutsche Wohnen!

XTRA:DWNI Historical Dividend Yield March 27th 2020
XTRA:DWNI Historical Dividend Yield March 27th 2020

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, Deutsche Wohnen paid out 21% of its profit as dividends. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Deutsche Wohnen paid out a conservative 50% of its free cash flow as dividends last year. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Is Deutsche Wohnen's Balance Sheet Risky?

As Deutsche Wohnen 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 measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Deutsche Wohnen has net debt of 12.05 times its EBITDA, which we think carries substantial risk if earnings aren't sustainable.

Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. Deutsche Wohnen has EBIT of 5.04 times its interest expense, which we think is adequate. Despite a decent level of interest cover, shareholders should remain cautious about the high level of net debt. Rising rates or tighter debt markets have a nasty habit of making fools of highly-indebted dividend stocks.

We update our data on Deutsche Wohnen every 24 hours, so you can always get our latest analysis of its financial health, 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 last decade of data, we can see that Deutsche Wohnen paid its first dividend at least nine years ago. 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 nine-year period, the first annual payment was €0.20 in 2011, compared to €0.90 last year. This works out to be a compound annual growth rate (CAGR) of approximately 18% a year over that time.

We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.

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. Deutsche Wohnen has grown its earnings per share at 7.9% per annum over the past five years. A low payout ratio and strong historical earnings growth suggests Deutsche Wohnen has been effectively reinvesting in its business. We think this generally bodes well for its dividend prospects.

Conclusion

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. It's great to see that Deutsche Wohnen is paying out a low percentage of its earnings and cash flow. Second, earnings growth has been ordinary, and its history of dividend payments is shorter than we'd like. Deutsche Wohnen has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Deutsche Wohnen has 5 warning signs (and 2 which don't sit too well with us) we think you should know about.

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

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.

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. Thank you for reading.