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 New York Community Bancorp (NYSE:NYCB) 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 New York Community Bancorp 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.
New York Community Bancorp yields a whopping 7.1%, considerably 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.
New York Community Bancorp's payout ratio is a high 90%.
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 ratio is a commonly used leverage metric for banks that compares equity and reserves with total risk-weighted assets. When we're not in a non-financial crisis, a ratio above 13% is generally considered to be relatively conservative.
New York Bancorp has a Tier 1 capital ratio of 13.7%.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Despite the financial crisis and recession, New York Bancorp has managed to grow earnings per share at an annual rate of 8% over the past five years. Its dividend has remained unchanged.
The Foolish bottom line
New York Community Bancorp could very well be a dividend dynamo. It has a large yield, a reasonably conservative capital buffer, and growth to boot. Given its large payout ratio, however, dividend investors should keep in mind that the bank will have to be able to continue growing earnings in order to fund much future dividend growth.
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Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.