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Zooming in on TSE:GMP's 4.8% Dividend Yield

Simply Wall St

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Could GMP Capital Inc. (TSE:GMP) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

In this case, GMP Capital likely looks attractive to investors, given its 4.8% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. The company also bought back stock during the year, equivalent to approximately 4.7% of the company's market capitalisation at the time. There are a few simple ways to reduce the risks of buying GMP Capital for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

TSX:GMP Historical Dividend Yield, June 7th 2019

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although GMP Capital pays a dividend, it was loss-making during the past year. When a loss-making financial company pays a dividend, the dividend is not being paid out of profit, which is a concern if the company can't return to operating profitably.

Remember, you can always get a snapshot of GMP Capital's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. GMP Capital has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was CA$0.20 in 2009, compared to CA$0.10 last year. This works out to be a decline of approximately 6.7% per year over that time. GMP Capital's dividend has been cut sharply at least once, so it hasn't fallen by 6.7% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying GMP Capital for its dividend, given that payments have shrunk over the past ten years.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. In the last five years, GMP Capital's earnings per share have shrunk at approximately 19% per annum. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. GMP Capital is paying out a dividend despite reporting a loss; clearly a concern. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, GMP Capital looks suboptimal from a dividend investment perspective.

See if management have their own wealth at stake, by checking insider shareholdings in GMP Capital stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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.