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 than 80% could be a red flag.

Each of these ratios reflect dividends paid in the trailing 12 months, while yields are the expected forward yield. Let's examine Albemarle (NYSE: ALB) and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

Albemarle 1.3% 15.6 13.9% 33.3%
RPM International (NYSE: RPM) 3.7% 5.3 55.7% 100.7%
Cytec Industries (NYSE: CYT) 1.1% 6.3 9.0% 16.4%
FMC (NYSE: FMC) 0.7% 14.5 17.7% 11.0%

Source: S&P Capital IQ.

With an interest coverage of 15.6, Albemarle covers every $1 in interest expenses with $15 in operating earnings. Given that its EPS payout ratio and FCF payout ratio are also solid, at 13.9% and 33.3% respectively, you shouldn't have to worry that Albemarle will need to cut its dividend anytime soon.

Another tool for better investing
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