The board of Labrador Iron Ore Royalty Corporation (TSE:LIF) has announced it will be reducing its dividend by 36% from last year's payment of CA$0.70 on the 26th of January, with shareholders receiving CA$0.45. However, the dividend yield of 8.7% is still a decent boost to shareholder returns.

View our latest analysis for Labrador Iron Ore Royalty

Labrador Iron Ore Royalty Doesn't Earn Enough To Cover Its Payments

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. It will be difficult to sustain this level of payout so we wouldn't be confident about this continuing.

Over the next year, EPS is forecast to fall by 21.5%. If the dividend continues along recent trends, we estimate the payout ratio could reach 136%, which could put the dividend in jeopardy if the company's earnings don't improve.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2013, the annual payment back then was CA$1.50, compared to the most recent full-year payment of CA$2.80. This means that it has been growing its distributions at 6.4% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Labrador Iron Ore Royalty might have put its house in order since then, but we remain cautious.

There Isn't Much Room To Grow The Dividend

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Labrador Iron Ore Royalty has grown earnings per share at 7.8% per year over the past five years. However, the payout ratio is very high, not leaving much room for growth of the dividend in the future.

Labrador Iron Ore Royalty's Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The payments are bit high to be considered sustainable, and the track record isn't the best. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 2 warning signs for Labrador Iron Ore Royalty that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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