Glossary · UK
What is Dividend Cover?
A ratio showing how many times over a company's earnings could pay its declared dividend, used to assess whether a dividend payment is sustainable or at risk of being cut.
Full Definition
Dividend cover (also called the dividend cover ratio) measures how comfortably a company's earnings support its declared dividend, calculated as earnings per share divided by dividend per share -- a dividend cover of 2 means the company earned twice as much as it paid out in dividends, giving a reasonable margin of safety, while a dividend cover below 1 means the company paid out more in dividends than it earned that year, which is generally unsustainable over the long run unless funded from cash reserves or borrowing. Investors and analysts commonly use dividend cover alongside dividend yield when assessing income shares, because a high dividend yield combined with weak or falling dividend cover can be a warning sign that the market has already priced in an expected dividend cut, whereas a share with a more modest yield but strong, stable dividend cover may represent a more reliable long-term income holding. Dividend cover can be volatile for cyclical businesses whose earnings swing significantly from year to year, even where the company tries to maintain a stable or gradually growing dividend policy through the cycle by smoothing payouts relative to underlying, more variable profits, which is why analysts often look at dividend cover averaged over several years rather than relying on a single year's figure in isolation. Real estate investment trusts and some infrastructure or investment trusts can legitimately run with lower dividend cover than an ordinary trading company, because tax and regulatory rules can require them to distribute a high proportion of their taxable profits to shareholders as a condition of their special tax status.