Chevron: 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 Chevron (NYS: CVX) stacks up. In this series, we consider four critical factors investors should examine in every dividend stock. We'll then tie it all together to look at whether Chevron is 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.

Chevron yields 3.1%, quite a bit higher than the S&P 500 2.1%.

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.

Chevron has a modest payout ratio of 22%. That may seem insanely low, but keep in mind that exploration and production companies need to retain a lot of cash to finance capital projects. ExxonMobil (NYS: XOM) , ConocoPhillips (NYS: COP) , and BP (NYS: BP) also have payout ratios is the ballpark of 20% to 30%.

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 Chevron stacks up next to its peers:

Company

Debt-to-Equity Ratio

Interest Coverage

Chevron Corporation8%9,283 times
ExxonMobil10%191 times
ConocoPhillips42%22 times
BP41%35 times

Source: S&P Capital IQ.

Chevron carries a negligible amount of debt.

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.

Company

5-Year Annual Earnings-per-Share Growth

5-Year Dividend-per-Share Growth

Chevron11%9%
ExxonMobil5%8%
ConocoPhillips(6%)13%
BP2%(6%)

Source: S&P Capital IQ.

The Foolish bottom line
Chevron exhibits a clean dividend bill of health. It has a generous yield, and modest payout ratio, negligible debt, and growth to boot. So Chevron could very well be a dividend dynamo. If you're looking for other great dividend stocks, 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 healthy dividend payers.

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

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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