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 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.
Synovus yields 2.1%, slightly higher than the S&P's 1.8%.
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 when its dividend yield doesn't seem particularly high.
Synovus doesn't have a payout ratio because it doesn't have earnings.
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 Tier 1 capital ratio is a commonly used leverage metric for banks that compares equity and reserves with total risk-weighted assets. In a non-financial crisis, a ratio above 13% is generally considered to be relatively conservative. To get a sense of loan performance, the non-performing loan-to-total loan ratio is useful. Less than 1% is ideal, while greater than 3% is a sign that the bank is holding a lot of bad loans on its books.
Let's examine how Synovus stacks up next to its peers.
Tier 1 Capital Ratio
|Zions (Nasdaq: ZION )||15.8%||3.4%|
|TCF Financial (NYSE: TCB )||12.7%||2.2%|
|Susquehanna (Nasdaq: SUSQ )||12.7%||2.3%|
Source: Capital IQ, a division of Standard & Poor's.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
The financial crisis wasn't very kind to Synovus, which has been unable to turn a profit since 2007.
The Foolish bottom line
While Synovus isn't likely to cut its nominal penny-per-quarter dividend, and its nonperforming loan ratio has improved somewhat over the past few years, the company still has some way to go before it could raise those payouts.