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 80% could be a red flag.

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

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

Monsanto

1.5%

15.3

39.0%

33.2%

Air Products & Chemicals (NYSE: APD)

2.5%

13.0

40.7%

71.6%

DuPont (NYSE: DD)

3.0%

7.1

45.9%

(297.8%)

Dow Chemical (NYSE: DOW)

2.9%

2.7

32.4%

93.2%

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

With an interest coverage of 15.3, Monsanto covers every $1 in interest expenses with more than $15 in operating earnings. Given its EPS payout ratio and FCF payout ratio are below 40%, you shouldn't have to worry that Monsanto will need to cut its dividend anytime soon.

Another tool for better investing
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Follow Dan Dzombak on Twitter at @DanDzombak to check out his musings and see what articles he finds interesting. Motley Fool newsletter services have recommended creating a synthetic long position in Monsanto. 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.