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 Erie Indemnity
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.
Erie Indemnity yields 2.9%, moderate but 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.
Erie Indemnity's payout ratio is a moderate 62%.
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.
Erie Indemnity doesn't have any 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 Erie Indemnity stacks up next to its peers:
|
Company |
Earnings-per-share growth |
Dividend-per-share Growth |
|---|---|---|
|
Erie Indemnity |
(3%) |
8% |
|
CNA Financial |
22% |
N/A |
|
Cincinnati Financial |
(17%) |
5% |
|
Old Republic International |
N/A |
5% |
Source: Capital IQ, a division of Standard & Poor's.
Over the past five years, Erie hasn't been able to grow its earnings per share, though its dividend has grown at a moderate pace.
The Foolish bottom line
Erie exhibits a fairly clean dividend bill of health. Its payout appears sustainable, but it is high enough that additional dividend growth may require more earnings growth for support.
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