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Here's What You Should Know About NexPoint Residential Trust, Inc.'s (NYSE:NXRT) 2.2% Dividend Yield

Simply Wall St

Could NexPoint Residential Trust, Inc. (NYSE:NXRT) 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 stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

Investors might not know much about NexPoint Residential Trust's dividend prospects, even though it has been paying dividends for the last four years and offers a 2.2% yield. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on NexPoint Residential Trust!

NYSE:NXRT Historical Dividend Yield, October 22nd 2019

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, 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. Although NexPoint Residential Trust pays a dividend, it was loss-making during the past year. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

NexPoint Residential Trust paid out 52% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business.

It is worth considering that NexPoint Residential Trust is a Real Estate Investment Trust (REIT). REITs have different rules governing their payments, and are often required to pay out a high portion of their earnings to investors.

Is NexPoint Residential Trust's Balance Sheet Risky?

As NexPoint Residential Trust has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and 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). NexPoint Residential Trust has net debt of 13.39 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. NexPoint Residential Trust has interest cover of less than 1 - which suggests its earnings are not high enough to cover even the interest payments on its debt. This is potentially quite serious, and we would likely avoid the stock if it were not resolved quickly. Low interest cover and high debt can create problems right when the investor least needs them, and we're reluctant to rely on the dividend of companies with these traits. That said, NexPoint Residential Trust is in the real estate business, which is typically able to sustain much higher levels of debt, relative to other industries.

We update our data on NexPoint Residential Trust 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. NexPoint Residential Trust has been paying a dividend for the past four years. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past four-year period, the first annual payment was US$0.82 in 2015, compared to US$1.10 last year. Dividends per share have grown at approximately 7.5% per year over this time.

The dividend has been growing at a reasonable rate, which we like. We're conscious though that one of the best ways to detect a multi-decade consistent dividend-payer, is to watch a company pay dividends for 20 years - a distinction NexPoint Residential Trust has not achieved yet.

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. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see NexPoint Residential Trust has grown its earnings per share at 32% per annum over the past five years. With recent, rapid earnings per share growth and a payout ratio of 68%, this business looks like an interesting prospect if earnings are reinvested effectively.

We'd also point out that NexPoint Residential Trust issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we think NexPoint Residential Trust is paying out an acceptable percentage of its cashflow and profit. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. In sum, we find it hard to get excited about NexPoint Residential Trust from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in NexPoint Residential Trust stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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.