For many companies, it's that time of the quarter (or month) again -- time to release a dividend payout. For the aspiring dividend investor, it can be difficult to try and differentiate the quality of a company based purely on its surface level. Each company has its own unique way of calculating a payout, leaving investors feeling a bit like Goldilocks when it comes to choosing: some pay way too little for too long, some pay way more than they should, and some are, well, just right.
This month, three dividend players have payout dates coming soon, along with very different styles of dividends. Let's analyze their respective characteristics, and gauge the real strength of these payments.
The stalled-out payout
First, let's take a look at a company that has paid the same exact dividend for years and years. Cable manufacturer Belden (NYSE:BDC) sells networking products to enterprises and industrials, and will pay its latest quarterly dividend on Oct. 2.
The company has only paid investors $0.05 per quarter since as early as 2004, even though its revenue has grown 91% in that time frame, from $995 million, to $1.8 billion. Last year, the company paid cash dividends of $11.4 million, while its free cash flow clocked in at $98 million, and that was after at least four years of paying $9 million, and raking in between $85-$145 million in cash.
Where is all the rest of that cash going? One potential answer is to stock repurchases. In 2011, Belden purchased $50 million worth of stock through a share buyback program, and last year, upped its repurchasing ante even higher, to $75 million.
For the dividend investor looking for a fat payout, this company might not be the ideal pick. Belden currently yields a paltry 0.3%, but a healthy amount of cash flow spent on buybacks is a good sign because it allows currently held shares to increase in value. Belden's dividend might look a little stingy, but that doesn't mean the company is completely holding out on investors.
The newcomer's big payouts
On the opposite end of the spectrum is a dividend of a different color -- the royalty trust. These business entities are usually related to the oil and gas industry, and their profits aren't taxed at the corporate level, so long as they pay enough of their earnings to investors as dividends. Often, those payouts are big.
One such company with an imminent payout date (Sept. 16) is Pacific Coast Oil Trust (NYSE:ROYT), which has only been on the market since May 2012, but has wasted no time before doling out payments to its investors. The oil company has issued a dividend almost every month since its IPO, steadily increasing its amount while doing so.
When it comes to analyzing a dividend, the proof is in the cash flow. Seeing how much cash a company is bringing in, versus how much it's paying shareholders, is a top indicator of whether the business is biting off (or paying out) more than it can chew. Last year, Pacific Coast generated $41 million in free cash flow (or "distributable income" according to its 10-K), and paid all of it to shareholders.
This kind of finding may have risk-averse dividend investors proceeding with caution. Royalty trusts give big payouts, yes, but if all of a company's cash is going into its dividends, it has no room to protect itself from unforeseen market circumstances, such as potential mergers, or settling of debts. Giving your parachute to investors is a nice gesture, but you need at least something if problems occur.
The stalwart restaurant
One dividend's proverbial porridge is too hot, and the other's too cold, but are there any that are just right? To find out, let's shift from porridge to something more savory -- steak. Restaurant chain Texas Roadhouse (NASDAQ:TXRH) offers no-frills good food, and its stock has performed with the same kind of simple consistency since going public in 2004. The company offered a quarterly dividend since 2011 and, as its revenue has grown (from $1 billion to $1.2 billion), so has its payout. Up until 2012, the steakhouse upped its quarterly dividend amount once a year by $0.01, and this year, it took a higher boost of $0.02, to $0.12 per share. The company's next expected date of dividend payment will be Sept. 27.
In terms of cash flow, the company generated $61 million in 2012, and paid 44% of that -- $27 million -- in dividends. This is promising, because it shows the company is neither burning all its funds at once, nor withholding all but the tiniest of table scraps.
While Texas Roadhouse errs on the side of conservative -- it yields 1.9% and has a payout ratio of 44%, compared to the restaurant industry's average of 2.3% yield and 44% payout -- it is certainly a happy medium between Pacific Coast's big monthly payments, and Belden's quarterly nickels.
Finding the right payday
Texas Roadhouse may be the most sensible of these companies approaching payout dates, but there are many, many more companies that offer dividends, whether quarterly, monthly, or biannually. When looking for the right dividend stock, it's useful to make sure a company pays within their cash flow means, and also has a yield that is in accordance with what the rest of its industry, as well as the overall market in general, is paying. That way, investors can rest assured they're taking home a sustainable healthy payout without fear that their companies might soon combust.
Fool contributor Caroline Bennett has no position in any stocks mentioned. The Motley Fool recommends Texas Roadhouse. 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.