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DiamondRock Hospitality Company (NYSE:DRH)'s Could Be A Buy For Its Upcoming Dividend

Simply Wall St

It looks like DiamondRock Hospitality Company (NYSE:DRH) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 27th of September will not receive this dividend, which will be paid on the 11th of October.

DiamondRock Hospitality's next dividend payment will be US$0.1 per share, and in the last 12 months, the company paid a total of US$0.5 per share. Calculating the last year's worth of payments shows that DiamondRock Hospitality has a trailing yield of 4.9% on the current share price of $10.11. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether DiamondRock Hospitality can afford its dividend, and if the dividend could grow.

View our latest analysis for DiamondRock Hospitality

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. DiamondRock Hospitality is paying out an acceptable 50% of its profit, a common payout level among most companies. 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. Thankfully its dividend payments took up just 45% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that DiamondRock Hospitality'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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NYSE:DRH Historical Dividend Yield, September 22nd 2019

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see DiamondRock Hospitality's earnings have been skyrocketing, up 30% per annum for the past five years. Management appears to be striking a nice balance between reinvesting for growth and paying dividends to shareholders. Earnings per share have been growing quickly and in combination with some reinvestment and a middling payout ratio, the stock may have decent dividend prospects going forwards.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past ten years, DiamondRock Hospitality has increased its dividend at approximately 4.2% a year on average. Earnings per share have been growing much quicker than dividends, potentially because DiamondRock Hospitality is keeping back more of its profits to grow the business.

To Sum It Up

Is DiamondRock Hospitality worth buying for its dividend? We like DiamondRock Hospitality's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. There's a lot to like about DiamondRock Hospitality, and we would prioritise taking a closer look at it.

Wondering what the future holds for DiamondRock Hospitality? See what the ten analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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.