Readers hoping to buy Deterra Royalties Limited (ASX:DRR) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Deterra Royalties' shares before the 11th of March in order to receive the dividend, which the company will pay on the 31st of March.

The company's next dividend payment will be AU$0.12 per share. Last year, in total, the company distributed AU$0.14 to shareholders. Last year's total dividend payments show that Deterra Royalties has a trailing yield of 3.1% on the current share price of A$4.51. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Deterra Royalties

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Deterra Royalties paid out 101% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. A useful secondary check can be to evaluate whether Deterra Royalties generated enough free cash flow to afford its dividend. Over the last year it paid out 62% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while Deterra Royalties's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.



Click here to see the company's payout ratio, plus analyst estimates of its future dividends. historic-dividend

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. For that reason, it's encouraging to see Deterra Royalties's earnings over the past year have risen 58%. While we'd be remiss not to point out that a year is a very short time in dividend investing, it's an encouraging sign so far.

We do note though, one year is too short a time to be drawing strong conclusions about a company's future growth prospects.

Given that Deterra Royalties has only been paying a dividend for a year, there's not much of a past history to draw insight from.

To Sum It Up

Should investors buy Deterra Royalties for the upcoming dividend? Growing earnings per share and a normal cashflow payout ratio is an ok combination, but we're concerned that the company is paying out such a high percentage of its income as dividends. All things considered, we are not particularly enthused about Deterra Royalties from a dividend perspective.

If you're not too concerned about Deterra Royalties's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example, we've found 2 warning signs for Deterra Royalties that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.