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 Nokia (NYSE: NOK) and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

Nokia

8.3%

10.4

80.3%

46.6%

LM Ericsson Telephone (Nasdaq: ERIC)

1.9%

22.3

52.2%

39.6%

Garmin (Nasdaq: GRMN)

6.1%

519.9

61.2%

141.0%

Cisco Systems (Nasdaq: CSCO)

1.5%

13.7

4.7%

6.3%

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

With an interest coverage ratio of 10.4, Nokia covers every $1 in interest expenses with just over $10 in operating earnings. While its EPS payout ratio is a worrisome 80%, its FCF payout ratio is a more manageable 45%. You shouldn't have to worry that Nokia will need to cut its dividend, although investors are leaving the stock for dead along with fellow mobile phone pariah Research In Motion (Nasdaq: RIMM). At the price Nokia is trading at now, the risk/reward ratio is intriguing, especially with the cash flow the company is producing.

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Follow Dan Dzombak on Twitter at @DanDzombak to check out his musings and see what articles he finds interesting. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems, as well as creating an iron condor position in Garmin. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.