Dividend investors know that it pays to follow how much of a company's money goes toward funding its payouts. A nice yield now won't matter much if the company can't keep making those payments going forward.

Here, we'll highlight a given company and its closest competitors to see just how safe their dividends are, with a little help from three crucial tools:

  • The interest coverage ratio, or earnings before interest and taxes, divided by interest expense. The interest coverage ratio measures a company's ability to pay the interest on its debt. An interest coverage ratio less than 1.5 is questionable; a number less than 1 means that the company is not bringing in enough money to cover its interest expenses.
  • The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.
  • The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business' health. The FCF payout ratio measures the percentage of free cash flow devoted toward paying the dividend. Again, a ratio greater 80% could be a red flag.

Each of these ratios reflect dividends paid in the trailing 12 months; yields are the expected forward yield. Let's examine Intel(Nasdaq: INTC) and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio
Intel

3.8%

NM

30.6%

47.7%
Oracle (NYSE: ORCL)

0.7%

15.8

13.2%

11.2%
Texas Instruments (NYSE: TXN)

1.7%

NM

18.8%

31.6%
Qualcomm (Nasdaq: QCOM)

1.6%

41.4

33.0%

70.9%

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful.

Intel's interest coverage ratio of more than 2700 isn't particularly meaningful. The company has about $2 billion in long term debt, which is easily covered by its roughly $8 billion in free cash flow. Given that its EPS payout ratio and FCF payout ratio are below 50%, you shouldn't have to worry that Intel will need to cut its dividend anytime soon.

Another tool for better investing
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