A stock that pays a dividend yield of more than 5% can sometimes look risky from afar. This is especially true when the average stock in the S&P500 only pays 1.3%. Paying more than triple that number might seem too good to be true. specialist dealer Big 5 sporting goods (NASDAQ:BGFV) is even paying more than 5% — its yield currently sits at a whopping 6%. For a $50,000 investment, that would mean $3,000 in annual dividend income; any gains you made from the stock’s appreciation would be added.
It all sounds great, but is the yield really safe? One way to check this is to look at the company’s earnings. For the trailing 12 months, the company reported diluted earnings per share of $4.55. On an annual basis, the regular quarterly dividend of $0.25 pays $1 per share. So if you look strictly at the winnings, the payout percentage is incredibly modest at only 22%.
Another method involves looking at cash flow. In four quarters, the company generated $105 million in free cash. During that time, it has paid out $62 million in dividends. And even with that approach, the dividend seems safe — as long as the Big 5 can continue to deliver the relatively consistent results they’ve had over the past year.
There are some concerns going forward, as the company mentioned in its recent earnings release that it expects same-store sales to fall between 10% and 13% in the first quarter. But for now, that’s not enough to put the dividend at risk, given the large buffer the Big 5 has in terms of both cash flow and profitability. For dividend investors, this could lead to a solid bounce today.