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 Broadridge Financial Solutions (NYSE: BR) and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

Broadridge Financial Solutions

2.7%

29.1

48.8%

17.8%

Fidelity National Information Services (NYSE: FIS)

0.6%

4.4

16.7%

10.8%

Paychex (Nasdaq: PAYX)

3.9%

NA

87.9%

94.0%

Western Union (NYSE: WU)

1.6%

7.9

18.8%

16.3%

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

With an interest coverage of 29.1, Broadridge covers every $1 in interest expenses with $29.1 in operating earnings. Given its EPS payout ratio and FCF payout ratio are below 50%, you shouldn't have to worry that Broadridge will need to cut its dividend anytime soon.

Another tool for better investing
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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.