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.
ArcelorMittal yields 2.9%, quite a bit higher 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.
ArcelorMittal has a moderate payout ratio of 51%.
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 five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
ArcelorMittal has a debt-to-equity ratio of 44% and an interest coverage rate of four 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.
Much of the steel industry is still reeling from the economic downturn, and ArcelorMittal is no exception. While earnings are better than they were, in say, 2009 and are expected to continue improving, all told, over the past five years Mittal's earnings per share have plunged at an average annual rate of 30%. Meanwhile, its dividend, despite the cut in 2009, has actually grown at an average annual rate of 8%.
The Foolish bottom line
So is ArcelorMittal a dividend dynamo? Not exactly. The company has a moderately high yield, and with a reasonable payout ratio and manageable debt, a fairly clean dividend bill of health, too. However, dividend investors will want to keep an eye on the global economic recovery and the pace of ArcelorMittal's earnings rebound (which analysts expect to be substantial) to ensure that it's able to continue raising those payouts for years to come. If you're looking for some solid 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 Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of ArcelorMittal. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.
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