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 Senior Housing Properties (NYSE: SNH ) 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 Senior Housing Properties is a dividend dynamo or a disaster in the making.
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.
Senior Housing Properties yields a whopping 7%, considerably higher than the S&P 500's 2%.
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.
As a real estate investment trust (REIT), however, Senior Housing Properties is required by law to pay out more than 90% of its earnings in the form of dividends in return for not having to pay 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.
Senior Housing Properties has a debt-to-equity ratio of 74% and an interest coverage rate of two times.
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, Senior Housing Properties' earnings per share have grown at an average annual rate of 2%, while its dividend has grown at a 3% rate. That may seem a bit low, but REITs are at a disadvantage when it comes to per-share earnings growth because they can't retain a lot of their earnings for future investment.
The Foolish bottom line
So, is Senior Housing Properties a dividend dynamo? Perhaps. With a large yield and a bit of growth, Senior Housing Properties' dividend looks reasonably attractive. However, dividend investors will also want to keep an eye on the company's earnings stability to ensure that it's able to comfortably make its sizable interest payments. If you're looking for some great dividend stocks, I suggest you 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 these 11 generous dividend payers -- simply click here.