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.
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.
Superior Industries yields 3% -- considerably higher than the S&P 500’s 1.7%.
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. 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.
Superior Industries’ payout ratio is a moderate 34%.
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 Superior Industries stacks up next to its peers:
|Company||Debt-to-Equity Ratio||Interest Coverage|
American Axle & Manufacturing
China Zenix Auto
Source: Capital IQ, a division of Standard & Poor's. *N/A due to negative equity.
While its peers' debt burdens range from moderate to severe, Superior Industries doesn't carry any debt.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Superior Industries’ earnings have been fairly volatile over the past several years. It’s dividend has remained flat.
The Foolish bottom line
Superior Industries exhibits a fairly reasonable dividend bill of health. It has a moderate yield, a modest payout ratio, and no debt. Dividend investors will want to watch to make sure that the company’s earnings stabilize.
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Ilan Moscovitz doesn’t own shares of any companies mentioned. You can follow him on Twitter @TMFDada. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.