Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Chemtrade Logistics Income Fund (TSE:CHE.UN) is about to go ex-dividend in just two days. Investors can purchase shares before the 29th of April in order to be eligible for this dividend, which will be paid on the 26th of May.
Chemtrade Logistics Income Fund’s next dividend payment will be CA$0.05 per share. Last year, in total, the company distributed CA$0.60 to shareholders. Last year’s total dividend payments show that Chemtrade Logistics Income Fund has a trailing yield of 8.5% on the current share price of CA$7.03. If you buy this business for its dividend, you should have an idea of whether Chemtrade Logistics Income Fund’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Chemtrade Logistics Income Fund reported a loss last year, so it’s not great to see that it has continued paying a dividend. With the recent loss, it’s important to check if the business generated enough cash to pay its dividend. If Chemtrade Logistics Income Fund didn’t generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It distributed 36% of its free cash flow as dividends, a comfortable payout level for most companies.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Chemtrade Logistics Income Fund reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Chemtrade Logistics Income Fund’s dividend payments per share have declined at 6.7% per year on average over the past 10 years, which is uninspiring. While it’s not great that earnings and dividends per share have fallen in recent years, we’re encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
The Bottom Line
Has Chemtrade Logistics Income Fund got what it takes to maintain its dividend payments? 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. Bottom line: Chemtrade Logistics Income Fund has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.