The board of Freehold Royalties Ltd. (TSE:FRU) has announced that it will pay a dividend of CA$0.09 per share on the 15th of November. The dividend yield will be 7.7% based on this payment which is still above the industry average.

View our latest analysis for Freehold Royalties

Freehold Royalties' Payment Could Potentially Have Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, the company's dividend was much higher than its earnings. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.

The next year is set to see EPS grow by 144.5%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 41% which brings it into quite a comfortable range.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2014, the annual payment back then was CA$1.68, compared to the most recent full-year payment of CA$1.08. Doing the maths, this is a decline of about 4.3% per year. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Freehold Royalties Might Find It Hard To Grow Its Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see that Freehold Royalties has been growing its earnings per share at 190% a year over the past five years. Although earnings per share is up nicely Freehold Royalties is paying out 109% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

The Dividend Could Prove To Be Unreliable

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. We don't think Freehold Royalties is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 1 warning sign for Freehold Royalties that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield 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.