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Why You Should Leave RLJ Lodging Trust (NYSE:RLJ)'s Upcoming Dividend On The Shelf

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see RLJ Lodging Trust (NYSE:RLJ) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 27th of September in order to be eligible for this dividend, which will be paid on the 15th of October.

RLJ Lodging Trust's next dividend payment will be US$0.3 per share, and in the last 12 months, the company paid a total of US$1.3 per share. Looking at the last 12 months of distributions, RLJ Lodging Trust has a trailing yield of approximately 7.6% on its current stock price of $17.3. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for RLJ Lodging Trust

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. RLJ Lodging Trust is paying out an acceptable 70% of its profit, a common payout level among most companies. 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. A useful secondary check can be to evaluate whether RLJ Lodging Trust generated enough free cash flow to afford its dividend. Dividends consumed 65% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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.

NYSE:RLJ Historical Dividend Yield, September 22nd 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. So we're not too excited that RLJ Lodging Trust's earnings are down 2.5% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, eight years ago, RLJ Lodging Trust has lifted its dividend by approximately 10% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

To Sum It Up

Should investors buy RLJ Lodging Trust for the upcoming dividend? While earnings per share are shrinking, it's encouraging to see that at least RLJ Lodging Trust's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Curious what other investors think of RLJ Lodging Trust? See what analysts 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.