The board of Source Rock Royalties Ltd. (CVE:SRR) has announced that it will pay a dividend on the 15th of January, with investors receiving CA$0.006 per share. The dividend yield will be 9.0% based on this payment which is still above the industry average.

View our latest analysis for Source Rock Royalties

Source Rock Royalties Is Paying Out More Than It Is Earning

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before this announcement, Source Rock Royalties was paying out 162% of what it was earning, and not generating any free cash flows either. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.

EPS is set to grow by 21.8% over the next year if recent trends continue. Assuming the dividend continues along recent trends, we think the payout ratio could reach 162%, which probably can't continue without starting to put some pressure on the balance sheet.

Source Rock Royalties Is Still Building Its Track Record

The dividend has been pretty stable looking back, but the company hasn't been paying one for very long. This makes it tough to judge how it would fare through a full economic cycle. The annual payment during the last 2 years was CA$0.06 in 2021, and the most recent fiscal year payment was CA$0.072. This works out to be a compound annual growth rate (CAGR) of approximately 9.5% a year over that time. Investors will likely want to see a longer track record of growth before making decision to add this to their income portfolio.

Source Rock Royalties Might Find It Hard To Grow Its Dividend

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Source Rock Royalties has impressed us by growing EPS at 22% per year over the past five years. Although earnings per share is up nicely Source Rock Royalties is paying out 162% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

The Dividend Could Prove To Be Unreliable

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Source Rock Royalties' payments, as there could be some issues with sustaining them into the future. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. We would be a touch cautious of relying on this stock primarily for the dividend income.