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 Visa (NYS: V) 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 Visa is a dividend dynamo or a disaster in the making.
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.
Visa yields 0.9%, quite a bit lower than the S&P's 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.
Visa's payout ratio is a modest 12%.
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 -- a ratio less than 5 can be a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Visa carries almost no 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.
Here's how Visa has performed over the last few years:
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Source: S&P Capital IQ.
*2-year earnings-per-share growth.
It's been a growth-rich time for the credit card industry, but Visa has enjoyed particularly heady growth.
The Foolish bottom line
With a modest payout ratio, almost no debt, and strong growth Visa exhibits a clean dividend bill of health. It's yield is too low for it to be properly considered a dividend dynamo, however it has the financial strength to boost its payouts if it should choose to become one. To stay up-to-speed on Visa's dividend 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 MasterCard.Motley Fool newsletter serviceshave recommended buying shares of Visa.Motley Fool newsletter serviceshave recommended creating a write covered strangle position in American Express. 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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