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 Cal-Maine (Nasdaq: CALM) 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.

Cal-Maine yields 6.3% -- considerable and certainly worthy of further investigation.

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.

Cal-Maine's payout ratio is a modest 34%.

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.

Let's examine how Cal-Maine stacks up next to its peers:


Debt-to-Equity Ratio

Interest Coverage

Cal-Maine Foods


14 times

Sanderson Farms (Nasdaq: SAFM)


23 times

Unilever (NYSE: UL)


12 times

Archer Daniels Midland (NYSE: ADM)


6 times

Source: Capital IQ, a division of Standard & Poor's.         

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.

It's been a bumpy ride for Cal-Maine. Five years ago, the company was losing money. Earnings peaked at $152 million in fiscal 2008, before declining to $75 million over the past 12 months.

The Foolish bottom line
Cal-Maine exhibits a fairly clean dividend bill of health. It has a reasonable payout ratio and modest leverage. There could be room for additional dividend growth should earnings begin to grow again.

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Ilan Moscovitz doesn't own shares of any companies mentioned. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of Cal-Maine Foods. Motley Fool newsletter services have recommended buying shares of Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.