Forget PotashCorp: Here Is a

Better Dividend Stock

PotashCorp is a popular stock among income investors for two reasons: Highest dividend yield among

peersA solid dividend history, with the

company paying a dividend every quarter since 1990

POT’s eye-popping yield

However, that doesn’t mean that PotashCorp’s dividends are safe going forward. In fact, Mosaic looks like a safer dividend pick

right now for four reasons.

#1 Profit growth

Declining profits could result in lower dividends, especially if a company’s payout ratio is too high.

Similar dividend growth…Both Mosaic and PotashCorp grew their dividends at the same

rate during the past five years

…but different profit trendsHowever, PotashCorp’s profits dropped sharply in 2015, thanks to

its substantial exposure to the beleaguered potash industry.

What that meansMosaic and PotashCorp raised their dividends by 10% and 9%, respectively, in 2015.

However, a sharp decline in profits in 2015, and a projected 30% drop in earnings at mid-point this year, compelled PotashCorp to slash its quarterly dividend by 34% in January. It was the first such dividend cut in the company’s history.

Mosaic, on the other hand, hasn’t announced a cut yet, and it’s unlikely that it will, thanks to its lower payout ratio versus PotashCorp.

#2 Dividend payout ratio

Dividend payout ratio = percentage of earnings paid out as dividend. A lower payout ratio makes it easier for a company to sustain its dividends.

POT: Highest payout in the industry

Where POT loses

PotashCorp paid out its entire earnings of $1.52 per share in dividends in 2015.

A 100% payout ratio leaves PotashCorp with two options during periods of declining profits: cut its dividend or pay more than it earns to maintain it. Accordingly, POT reduced its dividend in January to sustain a payout ratio close to 100% in 2016.

Deteriorating industry conditions could further hurt Potash Corp’s earnings and dividends going forward.

Where MOS gains

Mosaic paid out $1.08 in dividends from earnings of $2.78 per share in 2015.

A dividend payout ratio of 39% leaves ample room for growth even if Mosaic’s earnings were to drop double digits this year.

Lower leverage and higher cash flows further strengthen the case for Mosaic’s dividends.

#3 Leverage

Higher debt means greater interest payments, which

lowers the amount of profits available for

dividends.

Mosaic: lower debt burden

#4 Cash flows

A company generating high free cash flow can offer greater and sustainable

dividends.

Mosaic: in a better position

What that means

The debt-to-capital ratio indicates how much a company relies on debt to finance its operations. Mosaic’s healthier ratio of 40% makes its dividends safer. Mosaic paid out $1.08 dividend per share, or less than 50% of its free cash flow per share of $2.2 in 2015. That gives the company leeway to sustain as well as increase its dividend going forward. PotashCorp paid out a whopping 120% of its free cash flow per share as dividend last year. That’s a red flag as it leaves no scope for further dividend increases.

Foolish bottom line

PotashCorp’s high dividend yield may attract income investors, but there are several red flags attached to it. Mosaic,

meanwhile, can still afford to increase its dividends even in challenging business

conditions thanks to a lower payout ratio and strong free cash flows.

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