U.S. Markets closed

Here's Why We're Wary Of Buying Independence Realty Trust, Inc.'s (NYSE:IRT) For Its Upcoming Dividend

Simply Wall St

Independence Realty Trust, Inc. (NYSE:IRT) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 26th of September, you won't be eligible to receive this dividend, when it is paid on the 25th of October.

Independence Realty Trust's upcoming dividend is US$0.2 a share, following on from the last 12 months, when the company distributed a total of US$0.7 per share to shareholders. Based on the last year's worth of payments, Independence Realty Trust stock has a trailing yield of around 5.0% on the current share price of $14.44. 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 check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Independence Realty Trust

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Independence Realty Trust paid out 109% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. 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. Over the last year, it paid out dividends equivalent to 268% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

As Independence Realty 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:IRT Historical Dividend Yield, September 22nd 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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Independence Realty Trust has grown its earnings rapidly, up 29% a year for the past five years. Earnings per share are increasing at a rapid rate, but the company is paying out more than we are comfortable with, based on current earnings. Fast-growing businesses normally need to reinvest most of their earnings in order to maintain growth, so we'd suspect that either earnings growth will slow or the dividend may not be increased for a while.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last six years, Independence Realty Trust has lifted its dividend by approximately 2.0% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

Final Takeaway

Is Independence Realty Trust an attractive dividend stock, or better left on the shelf? While it's nice to see earnings per share growing, we're curious about how Independence Realty Trust intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. 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 Independence Realty Trust? See what the eight 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.