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 American Eagle Outfitters (NYSE: AEO) 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 forward 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.

American Eagle Outfitters yields 3.5% -- moderate and worthy of further consideration.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. 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, even when its dividend yield doesn't seem particularly high.

American Eagle Outfitters' payout ratio is 54%. On a free cash flow basis, that figure falls to 32%.

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.

American Eagle Outfitters doesn't carry 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.

American Eagle Outfitters doesn't have a growth rate because it had negative earnings. Over the past five years, its dividend has grown at an annual rate of 3%.

Let's examine how American Eagle Outfitters stacks up next to its peers:


5-Year Annual Earnings-per-share growth

5-Year Annual Dividend Growth

American Eagle Outfitters,



Chico's FAS (NYSE: CHS)



Abercrombie & Fitch (NYSE: ANF)



Aeropostale (NYSE: ARO)



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

Earnings have fallen quite a bit for much of the apparel retail industry. American Eagle Outfitters' earnings decline appears to be leveling off.

The Foolish bottom line
American Eagle Outfitters exhibits a reasonable dividend bill of health. The company has a moderate payout ratio and no debt. Dividend investors will want to watch earnings growth to ensure that the company can produce the earnings it needs to increase those payouts.

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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 Aeropostale. 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.