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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 one 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's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.
Let's examine Assurant (NYSE: AIZ ) and three of its peers.
|
Company |
Yield |
Interest Coverage |
EPS Payout Ratio |
FCF Payout Ratio |
|---|---|---|---|---|
|
Assurant |
2.0% |
15.5 |
26.1% |
28.5% |
|
Aflac (NYSE: AFL ) |
2.6% |
21.1 |
26.1% |
17.4% |
|
Progressive (NYSE: PGR ) |
1.9% |
13.8 |
23.3% |
18.4% |
|
Unum Group (NYSE: UNM ) |
1.7% |
9.7 |
13.5% |
9.4% |
Source: Capital IQ, a division of Standard & Poor's.
With an interest coverage of 15.5, Assurant covers every $1 in interest expenses with more than $15 in operating earnings. Given its EPS payout ratio and FCF payout ratio are below 30%, you shouldn't have to worry that Assurant 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 My Watchlist, our free, personalized stock-tracking service.
- Add Assurant to My Watchlist.
- Add Aflac to My Watchlist.
- Add Progressive to My Watchlist.
- Add Unum Group to My Watchlist.
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