Is Rockwell Collins's Dividend Safe?

As a dividend investor, it pays to follow how much of a company's money goes toward funding its dividend. 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 percent of free cash flow devoted toward paying the dividend. Again, a ratio greater 80% could be a red flag.

Let's examine Rockwell Collins (NYSE: COL  ) and three of its peers.

Company	Yield	Interest Coverage	EPS Payout Ratio	FCF Payout Ratio
Rockwell Collins	1.6%	44.1	25.6%	55.5%
Raytheon (NYSE: RTN  )	3.5%	18.3	33.1%	35%
L-3 Communications (NYSE: LLL  )	2.1%	6.5	20%	21.8%
General Dynamics (NYSE: GD  )	2.5%	25.4	25%	22.8%

Source: Capital IQ, a division of Standard & Poor's.

With an interest coverage ratio of 44.1, Cliffs covers every $1 in interest expenses with $44 in operating earnings. Given its EPS payout ratio and FCF payout ratios are below 60%, you shouldn't have to worry that Rockwell Collins will need to cut its dividend anytime soon.

Another tool for better investing
Most investors don't keep tabs on their companies. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. We can help you keep tabs on your companies with MyWatchlist, our free, personalized stock-tracking service.

• Add Rockwell Collins to My Watchlist.
• Add Raytheon to My Watchlist.
• Add L-3 Communications to My Watchlist.
• Add General Dynamics to My Watchlist.