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 Eli Lilly
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.
Eli Lilly yields 4.9%, quite a bit higher than the S&P 500's 2.1%.
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.
Eli Lilly has a modest payout ratio of 47%.
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 times is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Eli Lilly has a debt-to-equity ratio of 47% and an interest coverage rate of 37 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.
Over the past five years, Eli Lilly has grown its earnings per share at an average annual rate of 7%, while its dividend has grown at a 4% rate.
The Foolish bottom line
Eli Lilly sure looks like a dividend dynamo. It has a moderate yield, a reasonable payout ratio, manageable debt, and growth to boot. Dividend investors will obviously still want to keep an eye on how well Eli Lilly manages the looming generic threat that’s looming over pharmaceutical companies to ensure that the company is able to continue growing its earnings -- and thereby its dividend -- in the future. If you’re looking for other great dividend stocks, check out "Secure Your Future With 11 Rock-Solid Dividend Stocks," a special report from the Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about the 11 generous dividend-payers -- simply click here.
