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 Ashford Hospitality (NYSE: AHT ) stacks up. In this series, we consider four critical factors investors should examine in every dividend stock. We'll then tie it all together to look at whether Ashford is 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.
Ashford yields 5.5%, 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.
The payout ratio is somewhat less important when evaluating real estate investment trusts like Ashford, because they are required to pay out at least 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 times is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Ashford has a debt-to-equity ratio of 218% and an interest coverage rate of 0.6 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, Ashford's dividend has fallen in half as hotel demand plummeted. The company has posted losses since 2008.
The Foolish bottom line
Given the losses the company is taking, as well as the fact that operating income is dwarfed by its interest costs, Ashford can't really be considered a dividend dynamo. That being said, the economy is cyclical. Should the hotel market recover enough to really boost operating income, we could see outsized dividend gains from this REIT.
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