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Dividend Investors: Don't Be Too Quick To Buy The Keg Royalties Income Fund (TSE:KEG.UN) For Its Upcoming Dividend

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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see The Keg Royalties Income Fund (TSE:KEG.UN) is about to trade ex-dividend in the next 3 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Keg Royalties Income Fund's shares before the 20th of December in order to be eligible for the dividend, which will be paid on the 31st of December.

The company's next dividend payment will be CA$0.095 per share, on the back of last year when the company paid a total of CA$1.14 to shareholders. Looking at the last 12 months of distributions, Keg Royalties Income Fund has a trailing yield of approximately 7.7% on its current stock price of CA$14.72. If you buy this business for its dividend, you should have an idea of whether Keg Royalties Income Fund's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Keg Royalties Income Fund

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Keg Royalties Income Fund paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. 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 cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Thankfully its dividend payments took up just 43% of the free cash flow it generated, which is a comfortable payout ratio.

Click here to see how much of its profit Keg Royalties Income Fund paid out over the last 12 months.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Keg Royalties Income Fund was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Keg Royalties Income Fund has seen its dividend decline 1.2% per annum on average over the past 10 years, which is not great to see.

Get our latest analysis on Keg Royalties Income Fund's balance sheet health here.

The Bottom Line

Is Keg Royalties Income Fund an attractive dividend stock, or better left on the shelf? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

So if you're still interested in Keg Royalties Income Fund despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To that end, you should learn about the 3 warning signs we've spotted with Keg Royalties Income Fund (including 2 which are potentially serious).

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.

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.

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