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 Boeing (NYSE: BA ) 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 Boeing 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.
Boeing yields 2.4%, 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 afBoeing, even when its dividend yield doesn't seem particularly high.
Boeing's payout ratio is a modest 29%.
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.
Boeing carries a moderately high 109% debt-to-equity ratio, but with an interest coverage rate of 13, it's not having much difficulty making its payments.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Boeing's earnings plunged pretty dramatically from 2008-2009 because of the financial crisis, but they've since recovered. All told, earnings per share have grown at an annual rate of 4%, while dividends have grown at a 5% rate. Analysts expect growth to pick up over the coming years, partly on the strength of its new Dreamliner model, which is finally in production after years of waiting.
The Foolish bottom line
Boeing looks like a solid dividend payer. It has a moderately high yield, a modest payout ratio, manageable debt, and growth to boot.
If you're looking for some other great dividend stocks, 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 the nine generous dividend-payers.