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 SUPERVALU (NYSE: SVU) 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.

SUPERVALU yields 3.7%, considerably higher than the S&P'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.

SUPERVALU doesn't have a payout ratio because it didn't generate net income over the past year, largely because of writedowns. On a free cash flow basis, the payout ratio is 13%.

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 SUPERVALU stacks up next to its peers:


Debt-to-Equity Ratio

Interest Coverage



2 times

Whole Foods Market (Nasdaq: WFM)


28 times

Kroger (NYSE: KR)


5 times

Safeway (NYSE: SWY)


4 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.

SUPERVALU didn't generate any net income over the last year, but the company has managed to increase its free cash flow sevenfold over the past five years. The dividend has shrunk at an annual rate of 11%.

The Foolish bottom line
Assuming SUPERVALU is able to maintain its current level of free cash flow, the dividend appears sustainable. The company's debt burden is high, however. Dividend investors will want to keep an eye on the company's leverage and free cash flow stability.

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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 Whole Foods Market and SUPERVALU. Motley Fool newsletter services have recommended buying shares of Whole Foods Market. Motley Fool newsletter services have recommended buying calls in SUPERVALU. 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.