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.

Let's examine DRDGOLD (Nasdaq: DROOY) and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio
DRDGOLD

1.5%

21.6

4.9%

60.2%
Yamana Gold (NYSE: AUY)

1.6%

21.1

15.9%

49.4%
Goldcorp (NYSE: GG)

0.9%

31.1

9.7%

41.4%
Silver Wheaton (NYSE: SLW)

0.4%

NA

2.9%

9.5%

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

With an interest coverage of 21.6, DRDGOLD covers every $1 in interest expenses with over $21 in operating earnings. Given that its EPS payout ratio is below 5% and its FCF payout ratio is below 60%, you shouldn't have to worry that DRDGOLD will need to cut its dividend anytime soon.

Another tool for better investing
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