Dividend investing is a tried-and-true strategy for generating strong, steady returns in both good and bad economies. 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 examine how Aqua America (NYSE: WTR ) 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.
Aqua America yields 2.9% -- moderate and worthy of further investigation.
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.
Aqua America’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 Aqua America stacks up next to its peers:
|
Company
|
Debt-to-Equity Ratio
|
Interest Coverage
|
|
Aqua America
|
138%
|
4 times
|
|
American Water Works (NYSE: AWK )
|
138%
|
2 times
|
|
California Water (NYSE: CWT )
|
118%
|
3 times
|
|
American States Water (NYSE: AWR )
|
95%
|
4 times
|
Source: Capital IQ, a division of Standard & Poor's.
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.
Over the past five years, Aqua America’s earnings per shares have grown by 7% annually, while its dividend has grown at an 8% rate.
The Foolish bottom line
Aqua America exhibits a reasonable dividend bill of health. Its payouts are covered by earnings. Because of its fairly significant leverage, dividend investors will want to ensure that the company is able to maintain stable earnings.
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