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North European Oil Royalty Trust (NYSE:NRT) Is Increasing Its Dividend To US$0.38

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North European Oil Royalty Trust (NYSE:NRT) has announced that it will be increasing its dividend on the 25th of May to US$0.38. This takes the dividend yield from 2.3% to 4.5%, which shareholders will be pleased with.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that North European Oil Royalty Trust's stock price has increased by 59% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

View our latest analysis for North European Oil Royalty Trust

North European Oil Royalty Trust Is Paying Out More Than It Is Earning

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, the company was paying out 101% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 63%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

Over the next year, EPS could expand by 0.6% if the company continues along the path it has been on recently. Assuming the dividend continues along recent trends, we think the payout ratio could reach 115%, which probably can't continue without starting to put some pressure on the balance sheet.

historic-dividend
historic-dividend

Dividend Volatility

The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. The first annual payment during the last 10 years was US$2.84 in 2012, and the most recent fiscal year payment was US$0.47. Dividend payments have fallen sharply, down 83% over that time. A company that decreases its dividend over time generally isn't what we are looking for.

North European Oil Royalty Trust May Find It Hard To Grow The Dividend

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Although it's important to note that North European Oil Royalty Trust's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. So the company has struggled to grow its EPS yet it's still paying out 101% of its earnings. Limited recent earnings growth and a high payout ratio makes it hard for us to envision strong future dividend growth, unless the company should have substantial pricing power or some form of competitive advantage.

Our Thoughts On North European Oil Royalty Trust's Dividend

Overall, we always like to see the dividend being raised, but we don't think North European Oil Royalty Trust will make a great income stock. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 3 warning signs for North European Oil Royalty Trust (1 is a bit concerning!) that you should be aware of before investing. Is North European Oil Royalty Trust not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.