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 L-3 Communications (NYSE: LLL) and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

L-3 Communications

2.1%

6.5

20.0%

21.8%

Lockheed Martin (NYSE: LMT)

3.7%

11.4

34.2%

34.9%

Northrop Grumman (NYSE: NOC)

3.1%

12.2

26.6%

21.7%

United Technologies (NYSE: UTX)

2.2%

10.9

34.5%

26.1%

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

With an interest coverage of 6.5, L-3 covers every $1 in interest expenses with $6.50 in operating earnings. And given its EPS payout ratio and FCF payout ratio below 25%, you shouldn't have to worry that L-3 will need to cut its dividend anytime soon.

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Follow Dan Dzombak on Twitter at @DanDzombak to check out his musings and see what articles he finds interesting. The Motley Fool owns shares of Northrop Grumman, L-3 Communications Holdings, and Lockheed Martin. Motley Fool newsletter serviceshave recommended L-3 Communications Holdings. 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.