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.
Intel yields 4.3%, 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.
Intel's payout ratio is a modest 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.
Intel has hardly any debt -- its debt-to-equity ratio is 5%, and interest is covered some 2,700 times over.
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 Intel stacks up next to its peers:
5-Year Earnings-Per-Share Growth
5-Year Dividend Growth
Advanced Micro Devices (NYS: AMD)
NVIDIA (NAS: NVDA)
Texas Instruments (NYS: TXN)
Source: Capital IQ, a division of Standard & Poor's. * No dividend.
The Foolish bottom line
Intel exhibits a clean dividend bill of health. Its moderate yield appears affordable and actually quite conservative, given the company's low payout ratio. There seems to be quite a bit of room for a rise in dividends, particularly if Intel continues to grow its earnings at these high rates.
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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@TMFDada. The Motley Fool owns shares of Texas Instruments. The Fool owns shares of and has bought calls on Intel.Motley Fool newsletter serviceshave recommended buying shares of NVIDIA and Intel; writing puts in NVIDIA; and creating a diagonal call position in Intel. 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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