Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.

The company we're looking at today is Titanium Metals (NYSE: TIE), which yields 2%.

As you might guess, Titanium Metals sells titanium. Like competitor Allegheny Technologies (NYSE: ATI), the aerospace industry makes up a large part of its business. With Boeing rolling out its 787 Dreamliner over the coming decade, Titanium Metals should do well.

Titanium Metals Corporation Total Return Price Chart

Titanium Metals Corporation Total Return Price Chart by YCharts

To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and, if so, how much it has grown.

Titanium Metals Corporation Dividend Chart

Titanium Metals Corporation Dividend Chart by YCharts

Although the chart doesn't clearly show it, Titanium Metals actually cut its dividend in 2009. The company resumed paying its $0.075-per-quarter dividend last year.

The other tools we use to evaluate the safety of a dividend are:

  • The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.
  • The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.

Source: S&P Capital IQ.

While it's paid a dividend, Titanium Metals has maintained a low earnings payout ratio.


Source: S&P Capital IQ.

There are some alternatives in the industry. Southern Copper (Nasdaq: SCCO) has the highest yield of all the company's peers with a yield of 9.5% and a payout ratio of 81%. Nucor (NYSE: NUE) has a yield of 3.7% and a payout ratio of 73%. United States Steel (NYSE: X) rounds out the group with a yield of 0.8%, but has lost money over the past 12 months, giving it a negative payout ratio.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.