Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
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 Intel (Nasdaq: INTC ) 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 Intel 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.
Intel yields 3.6%, 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.
Intel's payout ratio is a modest 35%.
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.
Intel carries a small debt-to-equity ratio of 15%, and its interest payments are insignificant.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Intel's earnings dropped off a bit in 2008-2009 because of the financial crisis, but they've more than recovered since. All told, earnings per share have grown at an annualized rate of 19% over the past five years, while dividends have grown at a 15% rate. For what it's worth, analysts expect an average of low double-digit growth over the coming years.
The Foolish bottom line
So, is Intel a dividend dynamo? It sure looks like it. It has a large dividend yield, a modest payout ratio, insignificant debt, and lots of growth to boot.
If you want to find out even more about whether Intel is a buy or not, including the major opportunities and risks for the chip giant as it defends its microprocessor business while attacking growth opportunities, check out The Motley Fool's premium report on Intel.