A stock that pays a dividend yield of more than 5% can sometimes look risky from afar. That's especially true when the average stock in the S&P 500 only pays 1.3%. Paying more than three times that figure could seem too good to be true. Specialty retailer Big 5 Sporting Goods (NASDAQ:BGFV) pays more than even 5% -- its yield is at an incredible 6% right now. On a $50,000 investment, that would mean $3,000 in annual dividend income; any gains you earned from the stock rising in value would be in addition to that.
It all sounds great, but is the yield really safe? One way to check is by looking at the company's earnings. In the trailing 12 months, the company has reported a diluted per-share profit of $4.55. On an annual basis, its regular quarterly dividend of $0.25 pays $1 per share. And so when strictly looking at profits, the payout ratio is incredibly modest at just 22%.
Another method involves looking at cash flow. In four quarters, the company has generated free cash of $105 million. During that time, it has paid out $62 million in dividends. And so even with that approach, the dividend looks to be safe – so long as Big 5 can continue generating the relatively consistent results it has produced in the past year.
There are some concerns moving forward, as the company mentioned in its latest earnings release that it was expecting same-store sales to decline between 10% and 13% in Q1. But for now, that isn't enough to put the dividend in jeopardy given the big buffer Big 5 has in both cash flow and profitability. For dividend investors, this could make for a solid pick up today.
