Before buying an interest in a publicly traded company, there are a number of things that you should think about. These things include the company's business model, valuation, and future earnings growth. Another important consideration is the dividend. It's important to remember that from 1930 to 2012, dividends accounted for about 42% of the gains in the S&P 500. 

Many investors pursue dividend-paying stocks to augment their returns with a nice income stream. Tobacco companies are some of the biggest dividend-paying companies around, and income investors often flock to them for the unique combination of a high yield and strong dividend growth. Let's take a look at the dividends of Philip Morris International (NYSE:PM), British American Tobacco (NYSE:BTI), and Imperial Tobacco (NASDAQOTH:IMBBY) to see which has the strongest dividend of the three in terms of investor return, sustainability, and future growth.

Dividend yield
The most obvious consideration when comparing dividends from different companies is the dividend yield, which represents the percentage of your investment that you receive back over the next 12 months, provided that the dividend doesn't change over that time.

Philip Morris International 4.7%
British American Tobacco 4.4%
Imperial Tobacco 4.5%

Table 1: Dividend Yields of Philip Morris International, British American Tobacco, and Imperial Tobacco

While the yields of these three companies are evenly matched for the most part, Philip Morris International has the highest yield if you're splitting hairs.

Dividend growth
When analyzing a dividend, there's more to it than just the yield. As an income investor, you want that dividend to grow over time in order to protect your income stream from the erosive effects of inflation, as well as to show confidence from management in the company's outlook. Table 2 shows the average dividend growth rate from our three companies over the last five years.

Philip Morris International 11.7%
British American Tobacco 11.3%
Imperial Tobacco 13%

Table 2: Five-Year Dividend Growth Rates From Philip Morris International, British American Tobacco, and Imperial Tobacco 

Table 2 shows impressive double-digit dividend growth rates for all three companies that easily outpace inflation. While all three companies look very strong in this category, Imperial Tobacco has the slight edge.

However, it should be mentioned that the dividend growth of Imperial Tobacco has gotten progressively smaller each year during that time period. In 2009, it was 15.9%, while its most recent increase was 9.4%. The same can be said for British American Tobacco, whose dividend recently increased by just 5.2% instead of 11.3% average growth over the last five years. Philip Morris International most recently increased its dividend by 10.6%, roughly in-line with what it has done over the last several years.

Philip Morris International has increased its dividend every year since being spun off from Altria in 2008. British American has increased its dividend every year since 2004, while Imperial Tobacco has increased its dividend every year since 1997.

In terms of past overall dividend growth, Imperial Tobacco wins out here.

Free cash flow payout ratio
While it's nice to see high yields and strong dividend growth rates, we need to make sure that the company in question is generating enough free cash flow to keep the dividend payments going. For this reason, I like to calculate the free cash flow payout ratio, which is the percentage of free cash flow that is eaten up by dividends over a given period of time. Lower free cash flow payout ratios are better as they leave more room for other activities as well as for future dividend increases.

Free cash flow is basically the cash flow a company generates in its operations minus capital expenditures required to maintain or expand the business.

Company TTM 4-Year Average
Philip Morris International 64% 58%
British American Tobacco 67% 61%
Imperial Tobacco 52% 45%

Table 3: Free Cash Flow Payout Ratios of Philip Morris International, British American Tobacco, and Imperial Tobacco  

Table 3 shows that none of the dividends from these three companies appear to be in any sort of danger. These three companies are currently generating more than enough free cash flow to cover their dividend payouts. While all of these companies have very good free cash flow payout ratios, Imperial Tobacco has the lowest free cash flow payout ratio of the three. 

Earnings per share growth forecasts
While it's good to look at what past dividend payouts have been and how they relate to past earnings, we need to get an idea as to what future dividend payouts are going to look like. One of the ways in which we do this is by looking at analyst forecasts for earnings-per-share growth.

Company 2014 2015
Philip Morris International -4% 9%
British American Tobacco 1% 9%
Imperial Tobacco 4% 5%

Table 4: Earnings Per Share Growth Forecasts For Philip Morris International, British American Tobacco, and Imperial Tobacco

Table 4 shows that both British American Tobacco and Imperial Tobacco are expected to grow earnings per share by an average of between 4% and 5% over the next couple of years. The earnings of Philip Morris International are expected to decline this year, due largely to foreign exchange effects.

My Foolish conclusion
All three of these tobacco companies have strong dividends that are more than supported by free cash flow. If analyst estimates hold true for the next couple of years, then for Philip Morris International to continue its streak of double-digit dividend increases, the company will need to expand its free cash flow payout ratio, which already sits at 64%. British American Tobacco has most recently been growing its dividend in the mid single-digit range. I think that it's reasonable to expect this type of dividend growth to continue, as they are expected to grow earnings per share at about the same rate.

Imperial Tobacco, meanwhile, has the highest dividend growth rate over the last five years and the longest streak of annual dividend increases. They also have the lowest free cash flow payout ratio of just 52%. This, along with expected earnings-per-share growth in the mid single-digit range, leads me to believe that the company will continue to have annual dividend growth in the upper single-digit range in the near future without putting too much pressure on their free cash flows.

David Schauber has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.