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.
H&R Block yields 4.9%, considerably higher than the S&P 500'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.
H&R Block has a moderate payout ratio of 56%.
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.
H&R Block has a debt-to-equity ratio of 128% and an interest coverage rate of 7 times.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Over the past five years, H&R Block has grown its earnings at an annualized rate of 10% and its dividend at a 3% rate. That's pretty impressive, but keep in mind that H&R Block has had some trouble keeping up with its competitor Intuit (NAS: INTU) , the maker of Quicken. Electronic tax preparation has its advantages, and Intuit has managed to grow its earnings at a steeper 14% rate, without having to carry nearly H&R Block's debt burden.
The Foolish bottom line
So, is H&R Block a dividend dynamo? It's a mixed picture. On the plus side, it has a big yield, a moderate payout ratio, manageable debt, and growth to boot. However, dividend investors interested in H&R Block will want to keep an eye on how well the company is able to handle its competitive threats. If you're looking for some great dividend stocks, I suggest you check out "Secure Your Future With 11 Rock-Solid Dividend Stocks," a special report from the Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about these 11 generous dividend payers - simply click here.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada. 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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