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 Huntington Bancshares
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.
Huntington yields 2.5%, a fair bit higher than the S&P 500'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.
Huntington has a modest payout ratio of 17%.
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 Tier 1 capital ratio is a commonly used leverage metric for banks that compares equity and reserves with total risk-weighted assets. In a non-financial crisis, a ratio above 13% is generally considered to be relatively conservative. Another more basic, but equally useful, metric is the assets-to-equity leverage ratio. On this measure, around 10 times is considered normal for U.S. commercial banks.
Huntington has a Tier 1 capital ratio of 12.1% and a leverage ratio of 10 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.
Earnings fell considerably during the financial crisis -- even dipping into negative territory in 2008 and 2009 before staging a comeback. All told, over the past five years, earnings have fallen at an average annual rate of 21%. Meanwhile, the bank cut its quarterly dividend from a height of $0.26 per share to a minimum of $0.01 before raising it to $0.04 last year.
The Foolish bottom line
Despite the difficulty it had, along with the rest of the banking industry during the financial crisis, Huntington could very well turn out to be a dividend dynamo. Non-performing loans are down, and capital levels are up. Meanwhile, it has a moderately high dividend yield, and payouts could see future increases given its low payout ratio and gradual earnings improvement. If you're looking for some other great dividend stocks, I suggest you check out "Secure Your Future With 9 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 nine other generous dividend payers -- simply click here.
