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 Royal Bank of Canada
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.
Royal Bank of Canada yields a whopping 4.0% -- moderate and worthy of further consideration.
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 with 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.
Royal Bank of Canada's payout ratio is 54%.
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 Tier 1 capital ratio is a commonly used leverage metric for banks that compares equity and reserves with total risk-weighted assets. A ratio above 13% is generally considered to be conservative.
Let's examine how Royal Bank of Canada stacks up next to its peers.
|
Company |
Tier 1 Capital Ratio |
|---|---|
| Royal Bank of Canada | 13.6% |
|
Toronto-Dominion Bank |
12.7% |
|
Bank Of Nova Scotia |
11.8% |
|
Bank of Montreal |
13.8% |
Source: Capital IQ, a division of Standard & Poor's.
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.
|
Company |
5-Year Annual Earnings-Per-Share Growth |
5-Year Annual Dividend Growth |
|---|---|---|
| Royal Bank of Canada | 1% | 1% |
| Toronto-Dominion Bank | 0% | 8% |
| Bank Of Nova Scotia | 6% | 7% |
| Bank of Montreal | 1% | 7% |
Source: Capital IQ, a division of Standard & Poor's.
The Foolish bottom line
Royal Bank of Canada exhibits a fairly clean dividend bill of health. It has a moderate payout ratio and reasonable leverage. Dividend investors may want to watch the bank's earnings growth to ensure that it's able to continue increasing those payouts.
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