United Parcel Service: Dividend Dynamo or Blowup?

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 United Parcel Service (NYSE: UPS) 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 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.

UPS yields 3% -- moderate but not particularly cause for concern.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company pays out in dividends to the amount it generates. 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.

UPS payout ratio is a reasonable 49%.

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.

At a debt-to-equity ratio of 147%, UPS appears to have a fairly substantial debt burden, though its interest is easily covered by operating income -- 17 times over.

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 UPS stacks up next to its peers:

Source: Capital IQ, a division of Standard & Poor's.

UPS has struggled to grow its earnings over the past five years, an environment which apparently was much more forgiving to rail than air freight.

The Foolish bottom line
UPS exhibits a fairly clean dividend bill of health. Generating additional earnings growth would be beneficial, though the moderate payout suggests it could be possible to continue growing the dividend at a faster pace than earnings.

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