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 Aqua America (NYSE: WTR) stacks up. In this series, we consider four critical factors investors should examine in every dividend stock. We'll then tie it all together to look at whether Aqua America is a dividend dynamo or a disaster in the making.

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.

Aqua America yields 3%, considerably better than the S&P 500's 2.1%.

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.

Aqua America has a moderate payout ratio of 62%.

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 Aqua America stacks up next to its peers:

Company

Debt-to-Equity Ratio

Interest Coverage

Aqua America 132% 4 times
American Water Works 136% 2 times
California Water Service Group 114% 3 times
American States Water 85% 4 times

Source: S&P Capital IQ.

Aqua America has a fairly high debt-to-equity ratio, but that's not all that unusual among its industry. That's because water utilities are generally stable, capital-intensive businesses, meaning they have the ability and the need to carry a fair bit of debt.

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.

Company

5-Year Annual Earnings-per-Share Growth

5-Year Annual Dividend-per-Share Growth

Aqua America 9% 7%
American Water Works 0% 0%
California Water Service Group 8% 1%
American States Water 12% 4%

Source: S&P Capital IQ.

The Foolish bottom line
Aqua America exhibits a strong dividend bill of health. Its moderately high yield is covered by earnings, and it's done a good job growing over the past several years. Because of its fairly substantial leverage, dividend investors will want to ensure that the company is able to continue on its impressive track of earnings stability. If you're looking for some other great dividend stocks, I suggest you check out "Secure Your Future With 11 Rock-Solid Dividend Stocks," a special report from the Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about these 11 generous dividend payers -- simply click here.

Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of California Water Service Group. Motley Fool newsletter services have recommended buying shares of California Water Service Group and Aqua America. 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.