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 Pebblebrook Hotel Trust
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.
Pebblebrook yields 2.2%, a bit 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, Pebblebrook 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 five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Particularly for a REIT, Pebblebrook has a tiny debt-to-equity ratio of 23%, though its interest coverage is at just two 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.
Although Pebblebrook has experienced leadership, the company itself doesn't have a long history. So far, its performance looks good. Pebblebrook's earnings have increased to $14.9 million from a $0.6 million loss in 2009. Over that period, book value per share has increased at an average annual rate of 14%.
The Foolish bottom line
So, is Pebblebrook a dividend dynamo? Not exactly. While the young business seems to be going well so far, the stock doesn't yet have a particularly high yield or earnings growth history. However, 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.
