CBL & Associates: Dividend Dynamo or the Next Blowup?

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 CBL & Associates (NYSE: CBL) 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 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.

CBL & Associates yields 5.7%, considerably higher than the S&P’s 1.9%.

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.

The payout ratio is somewhat less important when evaluating Real Estate Investment Trusts -- or REITs -- like CBL, because they are required to pay out more than 90% of their earnings in the form of dividends in order to avoid paying corporate income taxes.

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.

Let's examine how CBL & Associates stacks up next to its peers:

Source: Capital IQ, a division of Standard & Poor's.

It’s not uncommon for commercial REITs to carry high debt loads, and CBL is no exception. That being said, leverage can be a burden in lean times, which is probably why CBL has decreased its debt somewhat over the past few years.

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.

The economic contraction has not been kind to mall operators, and CBL was no exception; over the past five years earnings have declined at an annual rate of 40%, while the dividend has shrunk at a 13% rate.

The Foolish bottom line
As a REIT, CBL & Associates naturally has a pretty nice yield. Whether it’s able to grow those payouts has a lot to do with economic conditions. Luckily, CBL’s rental revenue and operating earnings appear to be stabilizing, which is a positive sign.

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