Procter & Gamble: Dividend Dynamo or Disaster?

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as Corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's see how Procter & Gamble (NYSE: PG) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

P&G yields 3.2%, which seems reasonable and surpasses the industry median of 2%.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company pays out in dividends to the amount it generates. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford.

P&G's payout ratio is a mere 42%, which means the company can easily cover its dividend.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than 5 is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

With an interest coverage ratio of nearly 17 times and a debt-to-equity ratio of 49%, P&G's debt burden appears fairly manageable.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Let's examine how Procter & Gamble stacks up next to its peers:

Source: Capital IQ, a division of Standard & Poor's.
Median is based on medium- and large-cap U.S. industry components.

P&G has enjoyed solid profit growth, both in absolute and relative terms, over the past several years, which it has used to help fund a growing dividend.

The Foolish bottom line
On these four key metrics, Procter & Gamble shows a clean dividend bill of health. That's not to say it's impossible something could go wrong, but P&G appears in good shape.