Notices

Dividend cover

From Traderpedia

Definition:
The ratio between a company's earnings (net profit after tax) and the net dividend paid to shareholders, calculated as earnings per share divided by the dividend per share.


Contents

[edit] Calculation

<math>Dividend~cover = \frac{earnings~per~share}{gross~dividend~per~share}</math>

[edit] Example

If a company has earnings per share of 10p and it pays out a dividend of 3.5p, the dividend cover is 10 / 3.5 = 2.86

[edit] Interpretation

As a rule of thumb, a ratio of 2 or higher is normally considered safe (i.e. the company can easily afford to pay the dividend).

If the ratio is below 1.5 it's considered risky for the company.

If the ratio is under 1, then it means the company is paying this year's dividend from the previous year's retained earnings.

[edit] See also