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 examine how Cincinnati Financial
1. Yield
First and foremost, dividend investors like a large forward 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.
Cincinnati Financial yields 5.6% -- 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 paid out in dividends last year to the earnings it generated. 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, even if its dividend yield doesn't seem particularly high.
Cincinnati Financial's payout ratio is a moderate 68%.
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.
Cincinnati Financial's debt-to-equity ratio is 16%. Its interest coverage rate is 10 times.
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 Cincinnati Financial stacks up next to its peers:
|
Company |
5-Year Annual Earnings-Per-Share Growth |
5-Year Annual Dividend Growth |
|---|---|---|
|
Cincinnati Financial |
(17%) |
5% |
|
Chubb |
8% |
11% |
|
Allstate |
(5%) |
(9%) |
|
Progressive |
(1%) |
68% |
Source: Capital IQ, a division of Standard & Poor's.
The Foolish bottom line
Cincinnati employs limited leverage and its payouts are covered by earnings; however, dividend investors will want to watch the company to ensure that it's able to increase those earnings, too.
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