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.
Marathon yields 3%, a fair bit higher than the S&P's 2%.
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.
Marathon's payout ratio is 41%.
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 5 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 Marathon stacks up next to its peers:
Source: S&P Capital IQ.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Marathon Petroleum doesn't have an earnings or dividend history because it was recently spun off by Marathon Oil
The Foolish bottom line
Marathon Petroleum exhibits a fairly clean dividend bill of health. It has a reasonable payout ratio, debt load, and earnings growth. Dividend investors may want to keep an eye of the company's earnings consistency since a prolonged period of weak earnings could put some stress on the dividend, though its strong balance sheet should go a long way to helping the dividend weather the inevitable storms. To stay up to speed on Marathon's progress, add it to your stock watchlist. If you don't have one yet, you can create a free, personalized watchlist of your favorite stocks by clicking here.
Ilan Moscovitz doesn't own shares of any company 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.
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