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.
Wynn yields 1.8%, a bit less than the S&P 500's 2.0%.
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.
Wynn has a moderate payout ratio of 133%.
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 times 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 Wynn stacks up next to its peers:
Las Vegas Sands
Source: S&P Capital IQ.
It's charts like this that show why the casino industry isn't known for its dividend payers (Wynn is actually the only company here that pays a dividend at all.) The casino business is extraordinarily capital-intensive -- Las Vegas Sands, for instance, has spent over $5 billion in capital projects over just the past three years, MGM about the same over the past five, and Melco about $3 billion. That means lots of debt. But unlike, say, the utilities industry -- another capital-intensive industry requiring financing -- casinos are higher-risk than a stable utility, and they're linked to the ever-fickle tourism business. That makes it comparatively tricky to manage moderately high debt-to-equity ratios in quite the sort of safe, stable, reliable fashion that dividend investors tend to expect.
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
|Las Vegas Sands||5%|
Source: S&P Capital IQ. * Negative earnings over comparison period.
I think this metric actually understates Wynn's earnings-growth prospects, as it's generally a well-run company with some reasonably attractive growth prospects ahead of it, especially in Macao.
The Foolish bottom line
So, is Wynn a dividend dynamo? Probably not. That's not to say that it necessarily is a bad stock in general, and its 1.8% yield is impressive for its industry, but the company doesn't particularly have the characteristics of a dividend dynamo such as a high yield, modest payout ratio, easily manageable debt burden.
However, if you're looking for some 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 owns shares of Melco Crown. 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.