Lowe’s: Dividend Dynamo or Blowup?

Dividend investing is a tried-and-true strategy for generating strong, steady returns in both good and bad economies. 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 Lowe’s (NYSE: LOW) 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.

Lowe’s yields 2.4% -- a bit higher than the market average.

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.

Lowe's payout ratio is a modest 30%.

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.

Lowe’s debt-to-equity ratio is 38%, and it’s interest coverage rate is 10 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 Lowe’s stacks up next to its peers:

Source: Capital IQ, a division of Standard & Poor's. *Negative earnings. **3-year annual growth.         

The Foolish bottom line
Lowe’s dividend exhibits a fairly clean bill of health. Despite its difficulty growing earnings over the past five years, Lowe’s modest payout ratio should provide it maneuverability to continue making payouts.

To stay up-to-speed on the top news and analysis on Lowe's, or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.