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 RadioShack
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.
RadioShack yields a whopping 8.3%, considerably higher than the S&P 500's 1.9%.
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.
RadioShack has a payout ratio of 69%.
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.
RadioShack has a debt-to-equity ratio of 89% and an interest coverage rate of four 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, RadioShack's earnings per share have plunged from $1.74 to $0.65. Despite all this, the company actually doubled its annual dividend (which it now pays out quarterly) during that timeframe.
The Foolish bottom line
So is RadioShack a dividend dynamo -- or a blowup? Even with a massive yield, it's tough to name any company facing so much earnings headwind a dividend dynamo. That being said, the company's moderate payout ratio and reasonable overall debt size mean that it should be able to maintain its current payout level if it wants to -- assuming it's able to staunch that earnings bleeding (as many analysts think it can.)
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