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 BB&T (NYS: BBT) 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 BB&T 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.
BB&T yields 2.1%, slightly 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.
BB&T has a modest payout ratio of 35%.
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 Tier 1 capital ratio is a commonly used leverage metric for banks that compares equity and reserves with total risk-weighted assets. In a non-financial crisis, a ratio above 13% is generally considered to be relatively conservative.
BB&T has a Tier 1 capital ratio of 12.4%.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Like many of its peers, BB&T wasn't completely spared pain during the financial crisis. Over the past five years, earnings per share have fallen at an average annual rate of 8%, while its dividend has fallen at a 17% rate. However, credit quality and earnings, at least, are on the mend, and its dividend has begun to stabilize.
The Foolish bottom line
Although BB&T is showing progress in its recovery and has a decent yield, modest payout ratio, and a reasonable Tier 1 capital ratio, its yield and recent growth history don't say "dividend dynamo" quite yet. That said, I would say that BB&T's dividend scorecard looks pretty strong as far as banks go these days. 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 -- including BB&T. I invite you to grab a free copy to discover everything you need to know about New York Community Bancorp and the 10 other generous dividend payers -- simply click here.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.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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