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
1. Yield
First and foremost, dividend investors like a large 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 3.3% -- moderate and certainly not cause for alarm.
2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company pays out in dividends to the amount it generates. 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 35%, which is very conservative. Perhaps management is playing it safe in respect to the well-known cyclicality of the semiconductor industry.
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 five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Intel has negligible debt.
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.
Let's examine how Intel stacks up next to its peers:
|
Company |
5-Year Net Income Growth |
5-Year Dividend Per Share Growth |
|---|---|---|
|
Intel |
3% |
20% |
|
Texas Instruments |
5% |
37% |
|
Advanced Micro Devices |
179% |
0% |
|
Micron |
44% |
0% |
|
Median Semiconductor |
5% |
0% |
Source: Capital IQ, a division of Standard & Poor's. Averages are the median of medium- and large-cap U.S. industry components.
The semiconductor industry is populated by fast-growing companies and more stable dividend payers, but there's little overlap.
The Foolish bottom line
Intel exhibits a clean dividend bill of health. Its moderate yield appears affordable and actually quite conservative. There seems to be quite a bit of room for a rise in dividends, particularly if Intel jump-starts earnings growth.
