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We Wouldn't Be Too Quick To Buy Sotherly Hotels Inc. (NASDAQ:SOHO) Before It Goes Ex-Dividend

Simply Wall St

It looks like Sotherly Hotels Inc. (NASDAQ:SOHO) is about to go ex-dividend in the next 4 days. You will need to purchase shares before the 12th of September to receive the dividend, which will be paid on the 11th of October.

Sotherly Hotels's next dividend payment will be US$0.13 per share, and in the last 12 months, the company paid a total of US$0.52 per share. Looking at the last 12 months of distributions, Sotherly Hotels has a trailing yield of approximately 7.7% on its current stock price of $6.74. 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 investigate whether Sotherly Hotels can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Sotherly Hotels

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Sotherly Hotels distributed an unsustainably high 113% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. For regulatory reasons, it's not uncommon to see REITs paying out around 100% of their earnings. However, we feel Sotherly Hotels's payout ratio is still too high, and we wonder if the dividend is being funded by debt. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Sotherly Hotels didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the last year it paid out 50% of its free cash flow as dividends, within the usual range for most companies.

Click here to see how much of its profit Sotherly Hotels paid out over the last 12 months.

NasdaqGM:SOHO Historical Dividend Yield, September 7th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Sotherly Hotels reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Sotherly Hotels has increased its dividend at approximately 29% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

We update our analysis on Sotherly Hotels every 24 hours, so you can always get the latest insights on its financial health, here.

Final Takeaway

Is Sotherly Hotels worth buying for its dividend? It's hard to get used to Sotherly Hotels paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. Bottom line: Sotherly Hotels has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Keen to explore more data on Sotherly Hotels's financial performance? Check out our visualisation of its historical revenue and earnings growth.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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.