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 Harsco
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 it has grown.
Harsco has raised its dividend three times over the past five years to where it now rests at $0.21 per quarter.
To understand how safe a dividend is, we use two crucial tools, the first of which is:
- The interest coverage ratio, or the number of times interest is earned, 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 is not bringing in enough money to cover its interest expenses.
At 1.76, Harsco's interest coverage ratio is worrisome and investors should watch it closely.
We use another tool to evaluate the safety of a dividend:
- 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.
Source: S&P Capital IQ.
Harsco's earnings payout ratio skyrocketed in 2010 and now rests above 200%.
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 open 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.
- Add Harsco to My Watchlist.
For more dividend stock ideas, get The Motley Fool's free report, "11 Rock-Solid Dividend Stocks."
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