The board of Topaz Energy Corp. (TSE:TPZ) has announced that it will be paying its dividend of CA$0.33 on the 27th of September, an increased payment from last year's comparable dividend. This makes the dividend yield about the same as the industry average at 5.3%.

Check out our latest analysis for Topaz Energy

Topaz Energy Doesn't Earn Enough To Cover Its Payments

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Prior to this announcement, the company was paying out 336% of what it was earning. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.

The next 12 months is set to see EPS grow by 91.9%. Assuming the dividend continues along recent trends, we think the payout ratio could get very high, which probably can't continue without starting to put some pressure on the balance sheet.

Topaz Energy Doesn't Have A Long Payment History

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 dividend has gone from an annual total of CA$0.80 in 2021 to the most recent total annual payment of CA$1.32. This implies that the company grew its distributions at a yearly rate of about 18% over that duration. It is always nice to see strong dividend growth, but with such a short payment history we wouldn't be inclined to rely on it until a longer track record can be developed.

Dividend Growth Could Be Constrained

Investors could be attracted to the stock based on the quality of its payment history. We are encouraged to see that Topaz Energy has grown earnings per share at 50% per year over the past five years. Although earnings per share is up nicely Topaz Energy is paying out 336% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

Topaz Energy's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Topaz Energy's payments are rock solid. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for Topaz Energy 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.