U.S. Bancorp Pays Out 40% of Its Profit as Dividends. Here's How Much Room It Has to Raise Them.

There are several metrics by which to measure the quality and sustainability of a dividend. In all of the major metrics, U.S. Bancorp (NYSE:USB) ranks as one of the best among bank stocks.

U.S. Bancorp is the parent company of U.S. Bank, the fifth largest bank in the country with about $703 billion in assets under management as of Sept. 30. In the third quarter, it raised its dividend to $0.54 per share, up from $0.52 per share in the second quarter. This marks the 16th straight year that U.S. Bancorp has raised its dividend, meaning it was able to increase its annual payout during COVID in 2020, when many banks reduced theirs.

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Of the major banks, only JPMorgan Chase (NYSE:JPM) and PNC Financial (NYSE:PNC) match U.S. Bancorp's 16-year streak. It also has one of the highest yields among large banks, at 3.54%. Among large banks, currently only Truist Financial (NYSE:TFC), with a yield of 4.13%, pays out a higher rate.

Then there is the third key metric, payout ratio, which determines how sustainable the yield is.

No dividend trap

One of the things to watch out for with dividend stocks is a yield that is too high, unsustainably so, because they could be a dividend trap.

A dividend trap is a stock that has a high yield, but that high yield is more a function of its declining stock price -- because the yield is the dividend a company pays out annually divided by its current share price. So if the share price is down, the yield will be higher. And if the share price is down because the company is underperforming and seeing declining revenue and earnings, that's a red flag.

If the firm is still paying the same dividend when earnings are struggling, the yield will be high, but it may not be sustainable unless things turn around. So that's the trap.

That is not the case with U.S. Bancorp. The stock is outperforming the S&P 500 (SNPINDEX:^GSPC), up 17% year to date and 33% over the past year, with the dividend reinvested. Also, it has averaged a 27% annualized total return over the past three years.

That means its high yield is not because of a declining stock price but a robust payout.

The other metric to watch is the payout ratio, which gauges what percentage of earnings is allocated to the dividend. If it's too high, it signals the company is stretching to maintain or raise the dividend. That can raise a red flag because it shows the firm is spending too much to fund its dividend at the expense of other growth investments.

On this front, U.S. Bancorp also shines with a payout ratio of 40%. A 40% payout ratio is really the sweet spot for dividend stocks. If the ratio is too low, say, under 20%, it may indicate that not enough is being returned to shareholders. If it's too high, say over 50% or 60%, then the firm might be starting to stretch.

Based on its 40% payout ratio, U.S. Bancorp's high-yield dividend looks sustainable, as the bank has plenty of room to continue to raise it.

JPMorgan Chase is an advertising partner of Motley Fool Money. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase, Truist Financial, and U.S. Bancorp. The Motley Fool has a disclosure policy.