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.
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.
Heinz yields 3.6% -- moderate and certainly not cause for alarm.
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.
Heinz's payout ratio is a moderate 62%.
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 five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Let's examine how Heinz stacks up next to its peers:
|ConAgra (NYSE: CAG )||
|McCormick (NYSE: MKC )||
|Kraft (NYSE: KFT )||
Source: Capital IQ, a division of Standard & Poor's.
Heinz bears a fairly significant debt load.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Over the past five years, Heinz has grown its earnings per share at an annual rate of 19% and its dividend at a rate of 8%.
The Foolish bottom line
Heinz exhibits a fairly strong dividend bill of health. Its debt may be a bit of a concern, but the company is likely counting on its stable and growing earnings power to support that leverage.
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