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 Milwaukee-based Johnson Controls
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.
Johnson Controls yields 2.1%, a tad bit higher than the S&P 500's 2%
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.
Johnson Controls has a modest payout ratio of 26%.
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.
Johnson Controls has a reasonable debt-to-equity ratio of 52% and an interest coverage rate of 12 times.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Over the past five years, Johnson Controls' earnings per share grew at an average annual rate of 7%, while its dividend has grown at an 11% rate.
The Foolish bottom line
So is Johnson Controls a dividend dynamo? Perhaps. It has a moderate yield, a modest payout ratio, a reasonable debt burden, and growth to boot. While its yield may not be high enough for the stock to literally be called a "dividend dynamo" just yet, the company exhibits a strong dividend bill of health. Dividend investors will want to keep an eye on its earnings growth as well as dividend growth, which could continue to increase in excess of earnings thanks to the company's low payout ratio.
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Ilan Moscovitz doesn't own shares of any company mentioned. Motley Fool newsletter services have recommended buying shares of Johnson Controls. 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.