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 BB&T (NYSE: BBT), which yields 2.7%.

BB&T is a regional bank that, like peers Wells Fargo (NYSE: WFC) and US Bancorp (NYSE: USB), took TARP money from the government after getting hit hard by the mortgage crisis. However, BB&T also remarkably remained profitable even through the financial crisis.

BB&T Corporation Total Return Price Chart

BB&T 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.

BB&T Corporation Dividend Chart

BB&T Corporation Dividend Chart by YCharts

BB&T's dividend was cut from $0.47 per quarter to $0.15 per quarter in 2009. It has since been increased to $0.16 per quarter.

The 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.

BB&T's dividend payout ratio has been all over the place, although for the past two years, it has been just under 60% and declining.


Source: S&P Capital IQ.

There are some alternatives in the industry. FirstMerit (Nasdaq: FMER) has a yield of 4.5% and a payout ratio of just under 60%. Synovus Financial (NYSE: SNV) has a yield of 3% and a low payout ratio of 4.1%. Regions Financial (NYSE: RF) rounds out the group with a yield of 1% and a payout ratio of 1%.

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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.