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 Avon (NYSE: AVP) 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.

Avon yields 3.3% -- considerably higher than the S&P 500’s 1.7%.

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.

Avon’s payout ratio is a moderate 55%. On a free cash flow basis, that figure rises to 118%.

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 Avon stacks up next to its peers:


Debt-to-Equity Ratio

Interest Coverage

Avon Products


14 times

Estee Lauder (NYSE: EL)


13 times

Church & Dwight (NYSE: CHD)


20 times

Colgate-Palmolive (NYSE: CL)


58 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.

Avon’s earnings are roughly where they were five years ago, while its dividend has risen at an annual rate of 6%.

The Foolish bottom line
Avon exhibits a fairly reasonable dividend bill of health. It has a moderately high yield, manageable interest payments, and a reasonable net income payout ratio. Dividend investors will want to watch to make sure that the company can generate cash as well as it generates earnings.

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Ilan Moscovitz doesn’t own shares of any companies mentioned. You can follow him on Twitter @TMFDada. 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.