Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Retail Opportunity Investments Corp. (NASDAQ:ROIC) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 11th of September to receive the dividend, which will be paid on the 26th of September.
Retail Opportunity Investments's next dividend payment will be US$0.20 per share, on the back of last year when the company paid a total of US$0.79 to shareholders. Based on the last year's worth of payments, Retail Opportunity Investments stock has a trailing yield of around 4.4% on the current share price of $18.09. If you buy this business for its dividend, you should have an idea of whether Retail Opportunity Investments's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. Retail Opportunity Investments paid out more than half (66%) of its earnings last year, which is a regular payout ratio for most companies. While Retail Opportunity Investments seems to be paying out a very high percentage of its income, REITs have different dividend payment behaviour and so, while we don't think this is great, we also don't think it is unusual. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 71% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
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.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Retail Opportunity Investments's earnings per share have been shrinking at 4.9% a year over the previous five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 9 years, Retail Opportunity Investments has increased its dividend at approximately 14% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.
The Bottom Line
From a dividend perspective, should investors buy or avoid Retail Opportunity Investments? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Retail Opportunity Investments.
Ever wonder what the future holds for Retail Opportunity Investments? See what the six analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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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.