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 Whirlpool
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.
Whirlpool yields 2.5%, a bit better 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.
Whirlpool's payout ratio is a modest 21%.
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.
Whirlpool's debt-to-equity ratio is 55%. Its interest coverage is four times.
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.
Let's examine how Whirlpool stacks up next to its peers:
|
Company |
5-Year Earnings-Per-Share Growth Rate |
5-Year Dividend-Per-Share Growth Rate |
|---|---|---|
|
Whirlpool |
4% |
3% |
|
Emerson Electric |
8% |
10% |
|
General Electric |
(7%) |
(12%) |
|
Illinois Tool Works |
6% |
16% |
Sources: Yahoo! Finance and Capital IQ (a division of Standard & Poor's).
The Foolish bottom line
Whirlpool exhibits a fairly clean dividend bill of health. In fact, given its low payout ratio, the company could probably afford to raise its dividend somewhat.
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