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.
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.
Titanium Metals yields 2.2%, slightly 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.
Titanium Metals' payout ratio is a modest 13%.
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.
Titanium Metals doesn't carry any debt.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Let's examine how Titanium Metals stacks up next to its peers.
5-Year Earnings-per-Share Growth
3-Year Dividend Growth
Allegheny Technologies (NYS: ATI)
Carpenter Technology (NYS: CRS)
Source: Capital IQ, a division of Standard & Poor's.
Like many of its peers, Titanium Metals has struggled to maintain its earnings over the economic downturn, though its decline has been smaller than theirs. The company had to suspend its dividend beginning in early 2009, but it's been reinstated at the previous level.
The Foolish bottom line
Debt-free and with low payout rate, Titanium Metals exhibits a clean dividend bill of health for the time being. But dividend investors will want to keep an eye on Titanium Metals' earnings cyclicality to keep an eye out for potential future suspensions.
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At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any companies mentioned. You can follow him on Twitter, where he goes by@TMFDada.Motley Fool newsletter serviceshave recommended buying shares of Titanium Metals. 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.
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