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 Nucor
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.
Nucor yields 3.2%, quite a bit 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.
Nucor has a moderate payout ratio of 51%.
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 Nucor stacks up next to its peers:
|Steel Dynamics||100%||3.3 times|
|AK Steel||239%||1.4 times|
|United States Steel||121%||0.6 times|
Source: S&P Capital IQ.
Steel production is a highly capital-intensive business -- hence the moderately high debt loads for Steel Dynamics, AK Steel, and U.S. Steel. Each of those companies has a narrow margin of interest coverage, while U.S. Steel actually pays more in interest than it earns from operations. But it's important to keep in mind that the industry is somewhat depressed right now, so those interest coverage rates will rise a bit once earnings eventually come back. Nucor has a considerably smaller debt burden than its peers.
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
|United States Steel||N/A||(20%)|
Source: S&P Capital IQ. N/A = not applicable.
The economic downturn has been brutal for the steel industry. Nucor and Steel Dynamics have seen their earnings plunge, while AK Steel and U.S. Steel still aren't profitable on a 12-month basis. However, revenues and earnings have been improving across the board over the past couple of years.
The Foolish bottom line
With a moderately high yield, a modest payout ratio, and a reasonable debt burden, Nucor could very well be a dividend dynamo to the extent that we see the current economic recovery continue its progress. If you're looking for some other great dividend stocks, 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 the 11 generous dividend payers -- simply click here.
Ilan Moscovitz doesn't own shares of any company mentioned. Motley Fool newsletter services have recommended buying shares of Nucor. 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.