Caterpillar: Dividend Dynamo or Blowup?

Let's examine how Caterpillar (NYSE: CAT) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making. 1. Yield First and foremost, dividend investors like a large 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. Caterpillar yields 1.7% -- modest and certainly not cause for alarm. 2. Payout ratio The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company pays out in dividends with the amount it generates. 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. Caterpillar's payout ratio is a conservative 30%. 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 measurement of a company's total debt burden. Let's examine how Caterpillar stacks up next to its peers.... Read more