But there are a number of reasons why rules like this are short-sighted. It’s easy to argue a dividend that’s just been cut is actually more secure, especially if earning power stays about the same. And after seeing the carnage to the stock price after the first dividend cut, management likely doesn’t want to go through that again.
Such a situation is happening today with Dream Office REIT (TSX:D.UN).
The company announced it was cutting its dividend back in February, slashing the monthly payout from $0.186 per share to $0.125. That’s still enough for a 9% yield at today’s share price, which is pretty attractive in today’s low interest rate world.
Generally, a stock with a 9% yield is thought to have a risky dividend. Dream’s operations are struggling a bit, mostly thanks to its exposure to Calgary. But the company is still delivering pretty consistent earnings.
Based on the first six months of the year, Dream is on pace to deliver $2.66 per share in adjusted funds from operations in 2016, while only paying out $1.50 per share in dividends. That’s a payout ratio of 56%, which is among the lowest in the sector.
Even if Dream sees a hit in earnings--which is very possible--its dividend looks to be pretty safe.
