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.

Let's examine Qualcomm (Nasdaq: QCOM) and three of its peers in the technology space.



Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

Qualcomm 1.6% 41.4 33.0% 70.9%
InterDigital (Nasdaq: IDCC) 1.1% NA 7.0% 3.1%
Cisco Systems (Nasdaq: CSCO) 1.5% 13.7 4.7% 6.3%
Oracle 0.7% 14.5 13.9% 11.3%

Source: Capital IQ, a division of Standard & Poor's. Yield is forward looking while payout ratios are trailing and may not indicate a full year of payments.

With an interest coverage of 41.4, Qualcomm covers every $1 in interest expenses with more than $41 in operating earnings. Given its EPS payout ratio and FCF payout ratio are below 80%, you shouldn't have to worry that Qualcomm 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. The Motley Fool owns shares of Qualcomm and Oracle. The Fool has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems and InterDigital. 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.