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.
Altria yields a whopping 6%, considerably higher than the S&P's 2.2%.
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.
Altria has an enormous payout ratio of 91%.
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 Altria stacks up next to its peers:
Philip Morris International (NYS: PM)
Reynolds American (NYS: RAI)
Vector Group (NYS: VGR)
Source: S&P Capital IQ. N/A = not applicable due to negative equity.
Tobacco is a pretty stable business, so Altria, like many of its peers, can afford to carry a pretty significant amount of 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.
Altria spun off Philip Morris International in 2008. Over the past two years, Altria's earnings per share have grown by 5% annually, while its dividend has increased at a rate of 9%.
The Foolish bottom line
Altria exhibits a mediocre dividend bill of health. It has an enormous yield, a sky-high payout ratio, high leverage, and moderate earnings growth. Given the company's significant leverage, dividend investors may want to make sure that they're confident in the company's earnings stability. To stay up to speed on Altria's progress, add it to your stock watchlist. If you don't have one yet, you can create a free, personalized watchlist of your favorite stocks by clicking here.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada. The Motley Fool owns shares of Altria Group and Philip Morris.Motley Fool newsletter serviceshave recommended buying shares of Philip Morris. 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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