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Here's Why We're Wary Of Buying Community Healthcare Trust Incorporated's (NYSE:CHCT) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy Community Healthcare Trust Incorporated (NYSE:CHCT) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 15th of August in order to be eligible for this dividend, which will be paid on the 30th of August.

Community Healthcare Trust's next dividend payment will be US$0.41 per share, on the back of last year when the company paid a total of US$1.65 to shareholders. Based on the last year's worth of payments, Community Healthcare Trust has a trailing yield of 3.9% on the current stock price of $42.78. 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 Community Healthcare Trust

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Community Healthcare Trust paid out 126% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. For regulatory reasons, it's not uncommon to see REITs paying out around 100% of their earnings. However, we feel Community Healthcare Trust's payout ratio is still too high, and we wonder if the dividend is being funded by debt. 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. Community Healthcare Trust paid out more free cash flow than it generated - 117%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

As Community Healthcare Trust's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

NYSE:CHCT Historical Dividend Yield, August 10th 2019

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Community Healthcare Trust, with earnings per share up 4.3% on average over the last five years. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 4 years, Community Healthcare Trust has increased its dividend at approximately 2.4% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Should investors buy Community Healthcare Trust for the upcoming dividend? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Ever wonder what the future holds for Community Healthcare Trust? See what the five 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.