Pfizer: Dividend Dynamo or Disaster?

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 Pfizer (NYSE: PFE) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

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.

Pfizer yields 4.5%, which is moderately high and surpasses the industry dividend-paying median of 4%.

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.

Pfizer’s payout ratio is 66%, which appears fairly reasonable.

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.

Pfizer’s operating earnings cover its interest payments nine times over, and its debt-to-equity ratio is 50%. Both are reasonably in line with the industry medians.

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 Pfizer stacks up next to its peers:

Source: Capital IQ, a division of Standard & Poor's. Averages are the median of medium- and large-cap U.S. industry components. *Median dividend-paying pharma.

After a series of hikes, Pfizer cut its dividend in half last year to conserve capital for its $68 billion acquisition of Wyeth. Its payouts are on the rise once again.

The Foolish bottom line
With a moderate yield, moderate payout ratio, and moderate leverage, Pfizer exhibits a fairly clear dividend bill of health. Ultimately, the stability and growth of its dividend will depend on its ability to continue to develop and grow its pipeline of drugs and successfully integrate Wyeth.