Hartford Financial: Dividend Dynamo or the Next 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 Hartford Financial (NYS: HIG) 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 Hartford 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.

Hartford yields 2%, basically in line with the S&P 500.

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.

Hartford has a modest payout ratio of 29%.

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.

Hartford has a limited debt-to-equity ratio of 29% and an interest coverage rate of 1.6 times, though that figure fluctuates considerably from year to year depending on the size of policy benefits Hartford has to pay in a particular year.

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, Hartford's earnings per share have cratered. Though the insurer has managed to finish paying off its bailout loans, Hurricane Irene did take a bit of a toll last year. Because of fluctuating benefit payouts, it's often better to look at insurers' per-share book value growth. Clocking in at an average annual decline of 3% over the past few years, Hartford's performance here has been a bit rough as well. Hartford cut its quarterly dividend from a high of $0.53 per share in 2008 to $0.05 in 2009, before doubling it last year to $0.10.

The Foolish bottom line
So, is Hartford a dividend dynamo? With a moderate yield, a modest payout, and limited debt, Hartford exhibits a reasonably safe dividend bill of health (barring any truly monstrous catastrophe payouts, of course). However, shareholders will want to see Hartford improve its earnings and book value growth so that it can also grow its dividend over time. If you're looking for some great dividend stocks, I also suggest you 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 generous dividend payers -- simply click here.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned.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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