Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and see how that's changed over the past five years.

The company we're looking at today is Celanese (NYSE: CE), which yields 0.5%.

Dividend
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years and, if so, how much has it grown.

Celanese Corporation Dividend Chart

Celanese Corporation Dividend Chart by YCharts

Celanese's dividend was stead at $0.04 per quarter before it began rising in 2010. In two years, the dividend was raised twice, to where it now sits at $0.06 per quarter.

Immediate safety
To understand how safe a dividend is, we use two crucial tools, the first of which is:

  • The interest coverage ratio, or the number of times interest is earned, which is calculated by 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. A ratio less than 1.5 is questionable; a number less than 1 means the company is not bringing in enough money to cover its interest expenses.

Celanese Corporation Times Interest Earned TTM Chart

Celanese Corporation Times Interest Earned TTM Chart by YCharts

At 3.13, for every $1 in interest expense Celanese earns $3 in operating earnings.

Sustainability
The other tools we use to evaluate the safety of a dividend are:

  • 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.

Source: S&P Capital IQ.

Celanese's earnings payout ratio jumped with the financial crisis, but otherwise it has been steady in the single digits.

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.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.