Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.
The company we're looking at today is BB&T (NYS: BBT) , which yields 2.7%.
BB&T is a regional bank that, like peers Wells Fargo (NYS: WFC) and US Bancorp (NYS: USB) , took TARP money from the government after getting hit hard by the mortgage crisis. However, BB&T also remarkably remained profitable even through the financial crisis.
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and, if so, how much it has grown.
BB&T's dividend was cut from $0.47 per quarter to $0.15 per quarter in 2009. It has since been increased to $0.16 per quarter.
The tools we use to evaluate the safety of a dividend are:
The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.
The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.
Source: S&P Capital IQ.
BB&T's dividend payout ratio has been all over the place, although for the past two years, it has been just under 60% and declining.
Source: S&P Capital IQ.
There are some alternatives in the industry. FirstMerit (NAS: FMER) has a yield of 4.5% and a payout ratio of just under 60%. Synovus Financial (NYS: SNV) has a yield of 3% and a low payout ratio of 4.1%. Regions Financial (NYS: RF) rounds out the group with a yield of 1% and a payout ratio of 1%.
Another tool for better investing
Most investors don't keep tabs on their companies. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. We can help you keep tabs on your companies with My Watchlist, our free, personalized stock-tracking service.
Add BB&T to My Watchlist.
For more dividend stock ideas, get The Motley Fool's free report, "11 Rock-Solid Dividend Stocks."
At the time thisarticle was published Follow Dan Dzombak on Twitter at @DanDzombak to check out his musings and see what articles he finds interesting. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.