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 Altria
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.
Altria yields 5.7% -- 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.
Altria's payout ratio is a not-too-high 76%.
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 Altria stacks up next to its peers:
| Company | Debt-to-Equity Ratio | Interest Coverage |
|---|---|---|
| Altria | 222% | 6 times |
|
Philip Morris International |
306% | 12 times |
|
Reynolds |
62% | 12 times |
|
Vector Group |
N/A* | 1 time |
Source: Capital IQ, a division of Standard & Poor's.
*Negative equity.
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 expand.
Altria spun off Philip Morris International in 2008. Over the past two years, Altria's earnings per share have grown by 15% annually, while its dividend has increased at a rate of 9%.
The Foolish bottom line
Altria exhibits a fairly clean dividend bill of health. It has an enormous yield, a reasonable payout ratio, moderate leverage, and earnings growth. Given the company's somewhat significant leverage, dividend investors may want to make sure that they're confident in the company's earnings stability.
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