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 Williams Companies
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.
Williams Companies yields 2.8% -- 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 to the earnings it generated. Too high a ratio -- 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.
Williams Companies doesn't have a payout ratio, because it didn't generate earnings over the past year.
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.
Let's examine how Williams Companies stacks up next to its peers:
|
Company |
5-Year Annual Earnings-Per-Share Growth |
5-Year Annual Dividend Growth |
|---|---|---|
|
Williams Companies |
103% |
3 times |
|
Spectra Energy |
123% |
3 times |
|
ONEOK Partners |
119% |
3 times |
|
Sempra Energy |
104% |
3 times |
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.
Williams Companies doesn't have a growth rate because it had negative earnings. Over the past five years, its dividend has grown at an annual rate of 8%.
The Foolish bottom line
Particularly given its fairly significant leverage, which is common to oil and gas storage and transportation companies, dividend investors will want to watch Williams Companies to ensure that the company can generate the earnings it needs to continue making its payouts.
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