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 Apple (Nasdaq: AAPL) 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 Apple is a dividend dynamo or a disaster in the making.
1. Yield
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.
Apple yields 1.9%, basically in line with the S&P 500.
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.
Apple has a modest payout ratio of approximately 24% (based on trailing earnings).
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.
Apple doesn't carry any debt.
4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
All told, over the past five years, Apple's earnings per share have grown at an average annual rate of 67%. The company plans to initiate its first dividend payout since 1995 this summer and begin a US$10 billion buyback program later this year.
The Foolish bottom line
Apple looks like a dividend dynamo. Its moderate yield may not be the largest just yet, but it's secure and has plenty of room to grow because the company has a modest payout ratio, no debt, and growth to boot.
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The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
A version of this article, written by Ilan Moscovitz, originally appeared on fool.com
