Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.

The company we're looking at today is Silver Wheaton (NYSE: SLW) which yields 1.1%.

Industry
Silver Wheaton is a silver streamer. Unlinke silver miners such as Silvercrop Metals (NYSE: SVM) and Endeavor Silver (NYSE: EXK), a silver streamer invests in other people's mines for a fixed share of the mine's production at a fixed price. As such, when the price of silver goes up, a silver streamer's costs largely remain fixed and it profits handsomely.The company is doing very well, outperforming the Silver Miner ETF (NYSE: SIL) since it launched in April 2010 by 35 percentage points.

Silver Wheaton Total Return Price Chart

Silver Wheaton Total Return Price Chart by YCharts

Dividend
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and, if so, how much has it grown.

Silver Wheaton Dividend Chart

Silver Wheaton Dividend Chart by YCharts

Silver Wheaton's dividend only started paying a dividend this year. It started at $0.03 a quarter but recently was bumped up to $0.09 a quarter.

 Immediate safety
To understand how safe a dividend is, we use three crucial tools, the first of which is:

  • The interest coverage ratio, or the number of times interest is earned, which is calculated by earnings before interest and taxes, divided by interest expense. The interest coverage ratio measures a company's ability to pay the interest on its debt. A ratio less than 1.5 is questionable; a number less than 1 means the company isn't bringing in enough money to cover its interest expenses.

Silver Wheaton has no debt and as such has no interest to cover.

Sustainability
The other tools we use to evaluate the safety of a dividend are:

  • The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.
  • The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.

Slwpayoutratio

Source: S&P Capital IQ.

Silver Wheaton's payout ratio's are very low.

Another tool for better investing
Most investors don't keep tabs on their companies. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. We can help you keep tabs on your companies with My Watchlist, our free, personalized stock-tracking service.

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