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 New York Community Bancorp
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.
New York Community Bancorp yields a whopping 7.8%, considerably higher 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.
New York Community Bancorp has a moderately high payout ratio of 92%.
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 Tier 1 capital ratio is a commonly used leverage metric for banks that compares equity and reserves with total risk-weighted assets. In a non-financial crisis, a ratio above 13% is generally considered to be relatively conservative.
Let's examine how New York Community Bancorp stacks up next to its peers:
|Company||Tier 1 Capital Ratio|
|New York Community Bancorp||13.6%|
|People's United Financial||14.8%|
|First Niagara Financial||15.6%|
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.
5-Year Annual Earnings-per-Share Growth
5-Year Annual Dividend-per-Share Growth
|New York Community Bancorp||6%||0%|
|People's United Financial||7%||0%|
|First Niagara Financial||(6%)||7%|
Source: S&P Capital IQ. *Negative earnings.
The Foolish bottom line
New York Community Bancorp could very well be a dividend dynamo. Although it has a moderately high payout ratio, its yield is huge, the bank looks well-capitalized, and it has growth to boot. 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 -- including New York Community Bancorp. I invite you to grab a free copy to discover everything you need to know about New York Community and the 10 other generous dividend payers -- simply click 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.