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 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 percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.

Let's examine W&T Offshore (NYSE: WTI) and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

W&T Offshore

0.7%

3.8

11.9%

23.9%

Cabot Oil & Gas (NYSE: COG)

0.2%

2.0

14.5%

(4.1%)

Apache (NYSE: APA)

0.5%

27.7

6.5%

8.8%

Anadarko Petroleum (NYSE: APC)

0.5%

2.2

68.7%

(16.8%)

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

With an interest coverage ratio of 3.8, W&T Offshore covers every $1 in interest expenses with almost $4 in operati ng earnings. Given its EPS payout ratio and FCF payout ratio are below 25%, you shouldn't have to worry that W&T Offshore 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. Motley Fool newsletter services have recommended W&T Offshore. 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.