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Here's Why We're Wary Of Buying NorthWest Healthcare Properties Real Estate Investment Trust's (TSE:NWH.UN) For Its Upcoming Dividend

Simply Wall St

NorthWest Healthcare Properties Real Estate Investment Trust (TSE:NWH.UN) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 30th of July, you won't be eligible to receive this dividend, when it is paid on the 15th of August.

NorthWest Healthcare Properties Real Estate Investment Trust's next dividend payment will be CA$0.067 per share, and in the last 12 months, the company paid a total of CA$0.80 per share. Based on the last year's worth of payments, NorthWest Healthcare Properties Real Estate Investment Trust stock has a trailing yield of around 6.8% on the current share price of CA$11.82. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for NorthWest Healthcare Properties Real Estate Investment Trust

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 87% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. While NorthWest Healthcare Properties Real Estate Investment Trust 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. A useful secondary check can be to evaluate whether NorthWest Healthcare Properties Real Estate Investment Trust generated enough free cash flow to afford its dividend. It paid out 83% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

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.

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

TSX:NWH.UN Historical Dividend Yield, July 25th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. NorthWest Healthcare Properties Real Estate Investment Trust's earnings per share have fallen at approximately 19% a year over the previous 5 years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

We'd also point out that NorthWest Healthcare Properties Real Estate Investment Trust issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. NorthWest Healthcare Properties Real Estate Investment Trust's dividend payments are broadly unchanged compared to where they were four years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

The Bottom Line

Has NorthWest Healthcare Properties Real Estate Investment Trust got what it takes to maintain its dividend payments? 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. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Wondering what the future holds for NorthWest Healthcare Properties Real Estate Investment Trust? See what the two 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.

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.