Don't be fooled by New York Community Bancorp's
Remember, you should never consider a stock's yield without also looking at its payout ratio -- the dividend per share divided by earnings per share. The payout ratio increases when dividends grow faster than earnings, and (all else staying constant) the higher the ratio, the more likely that a drop in earnings will lead to a dividend cut. When a payout ratio tops 100%, a company is actually eating into its capital to support its dividend.
That's precisely what happened at New York Community Bancorp, despite its impressive growth throughout the early 2000s. EPS increased from $0.32 in 2000 to $0.75 in 2001, eventually peaking at $1.65 in 2003. Dividends increased in lockstep, from $0.25 per share in 2000 to roughly $0.66 in 2003.
But in 2004, earnings started to slide. EPS dropped to $1.33 in 2004, then $1.11 in 2005, and $0.81 in 2006. For the most part, the fault lay with an inverted yield curve, although a few one-time charges -- some related to acquisitions -- didn't help, either. Meanwhile, the dividend rose to a buck per share in 2005, where it remains today. Remember that payout ratio? It was 123% for 2006. Ouch.
Don't get me wrong. I'm not saying that it's inevitable, or even likely, that the company will cut its dividend. Most analysts predict a rebound in earnings, with a consensus estimate of $0.93 per share for 2007 and $1.04 for 2008. But why take the risk, especially when New York Community Bancorp's near-term fundamentals aren't too compelling to begin with?
Several other good banks offer modestly lower dividend yields, but their dividends are far more secure and offer better growth prospects. Take a look at Susqehanna Bancshares
US Bancorp is a Motley Fool Income Investor recommendation. James Early separates dividend payers from the dividend fakers in his market-beating investing service. See for yourself with a free 30-day trial.