CenterPoint Energy: Dividend Dynamo or Blowup?

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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 CenterPoint Energy (NYS: CNP) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
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.

CenterPoint Energy yields a whopping 4.5%, considerably higher than the S&P'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.

CenterPoint Energy's payout ratio is 65%.

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 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 CenterPoint Energy stacks up next to its peers:

Company

Debt-to-Equity Ratio

Interest Coverage

CenterPoint Energy

274%

2 times

Entergy (NYS: ETR)

139%

4 times

Ameren (NYS: AEE)

93%

3 times

Xcel Energy (NYS: XEL)

120%

3 times

Source: Capital IQ, a division of Standard & Poor's.

The multi-utilities industry tends to employ a decent amount of leverage, largely because it's a capital-intensive industry with fairly reliable earnings.

4. Growth
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, CenterPoint Energy's earnings per share have shrunk at an annual rate of 1%, while its dividend has grown at a rate of 13%.

The Foolish bottom line
CenterPoint Energy exhibits a fairly clean dividend bill of health. It has a significant yield and moderate payout ratio. Given the company's leverage, however, dividend-investors will want to keep an eye on earnings to make sure they remain consistent or -- better yet -- grow.

To stay up-to-speed on the top news and analysis on CenterPoint Energy, or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

At the time this article was published Ilan Moscovitzdoesn't own shares of any companies mentioned. You can follow him on Twitter @TMFDada. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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