The board of Source Rock Royalties Ltd. ( CVE:SRR ) has announced that it will pay a dividend of CA$0.0065 per share on the 15th of July. Based on this payment, the dividend yield on the company's stock will be 8.8%, which is an attractive boost to shareholder returns.

See our latest analysis for Source Rock Royalties

Source Rock Royalties Doesn't Earn Enough To Cover Its Payments

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, earnings were actually smaller than the dividend, and the company was actually spending more cash than it was making. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.

Over the next year, EPS could expand by 19.1% if the company continues along the path it has been on recently. If the dividend continues on its recent course, the payout ratio in 12 months could be 209%.

Although, as a Royalty Trust, EPS isn't the most important measure of dividend sustainability. The company uses the term "funds from operations" which describes the cash the company has on hand to pay dividends after all G&A expenses and taxes. Source Rock's dividend has consistently been 50%-60% a payout ratio of  these "funds from operations",  leaving 40%-50% of this cash to commplete additional royalty acquistions, which is much more sustainable.

Source Rock Royalties Has A Long Payment History

The dividend hasn't seen any major cuts in the past, and although the company only listed 2 years ago, they have been paying a dividend for much longer than that! The annual payment during the last 2 years was CA$0.06 in 2022, and the most recent fiscal year payment was CA$0.078. This means that it has been growing its distributions at 14% per annum over that time. Source Rock Royalties has been growing its dividend quite rapidly, which is exciting. Shareholders will be hoping this performance will persist across a full market cycle.

Dividend Growth Could Be Constrained

Investors could be attracted to the stock based on the quality of its payment history. It's encouraging to see that Source Rock Royalties has been growing its earnings per share at 19% a year over the past five years. Although per-share earnings are growing at a credible rate, the massive payout ratio may limit growth in the company's future dividend payments.

Source Rock Royalties' Dividend Looks Sustainable

Overall, we think this company makes a great dividend stock. In general, the distributions are a little bit higher than we would like when looking at EPS, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. Furthermore, when we look at the company's use of funds from operation, the dividend appears much more sustainable.