In order to better understand the failure process of water-bearing rocks, samples of water-bearing sandstone were tested uniaxially. The failure process and the development of internal cracks were studied through the evolution characteristics of dissipated strain energy and particle flow simulation. In this study, we found that: (1) The presence of water in sandstone results in a reduction in energy storage capacity as well as strength. (2) The dissipated energy ratio curve of sandstone samples and simulated samples’ internal fracture development curve has obvious stages. The dissipated energy ratio turning point and the rapid fracture development point are defined as the failure precursor points of sandstone samples and simulated samples, respectively. In both sandstone samples and simulated samples, the ratio between failure precursor stress and peak strength remains almost unchanged under various water conditions. (3) The ratio of fracture to dissipated energy (RFDE) of sandstone is proposed, and interpreted as the increased number of cracks in the rock under the unit dissipated. On this basis, the fracture initiation dissipated energy (FIDE) of sandstone under different water cut conditions is determined, that is, the dissipation threshold corresponding to the start of the development of sandstone internal cracks. (4) The analysis shows that RFDE increases exponentially and FIDE decreases negatively with the scale-up in moisture content. Further, high moisture content sandstone consumes the same dissipative strain energy, which will lead to more fractures in its interior. The research in this paper can lay a theoretical and experimental foundation for monitoring and early warning of rock engineering disasters such as coal mining, tunnel excavation, slope sliding, and instability.