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 Weyerhaeuser (NYS: WY) 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 Weyerhaeuser 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.
Weyerhaeuser yields 3.2%, considerably higher than the S&P 500 1.9%.
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.
As a real estate investment trust, however, Weyerhaeuser is required by law to pay out more than 90% of its earnings in the form of dividends in return for not having to pay corporate income taxes.
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.
Weyerhaeuser has a debt-to-equity ratio of 106% and an interest coverage rate of 1.4 times. That's not great, but it's not terribly unusual for the stable, capital-intensive forestry industry either.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
The housing bust hasn't been kind to Weyerhaeuser. All told, over the past five years, earnings per share have plunged at an average annual rate of 32%, while its dividend was reduced from $0.60 to $0.15.
The Foolish bottom line
With a tight balance sheet and shaky recent history, Weyerhaeuser doesn't appear to be a dividend dynamo just yet. Dividend investors will want to keep an eye on the company's earnings consistency and growth to ensure that it's able to comfortably meet its interest payments and hopefully regrow its dividend payouts as housing and the economy continue to recover. If you're looking for great dividend stocks, check out "Secure Your Future With 9 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 the nine generous dividend payers -- simply click here.
At the time thisarticle was published Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool has a disclosure policy. The Motley Fool owns shares of Weyerhaeuser. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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