Dividend cover

Dividend cover measures the number of times greater the net profits available for distribution are than the dividend payout.

Companies pay dividends to shareholders out of their profits. Directors decide what proportion of profits they will distribute: the amount varies depending on how well the company has done.

When assessing the financial health of a company, looking at 'dividend cover' can offer a guide as to how likely it is that the dividend will remain stable or rise in the future. It measures the number of times greater the net profits available for distribution are than the dividend payout.

A firm that makes £10m in profit and allocates £1m for dividends has a cover of ten and a firm that makes £25m but pays out £12.5m in dividends has a cover of just two.

A ratio of two or more suggests the dividend is so affordable that it will at least not fall. A ratio below 1.5 suggests the dividend might be at risk.

See Tim Bennett's video tutorial: A beginner's guide to dividends.

Recommended

Margin call
Glossary

Margin call

When an investor borrows to bet on markets, they put down a deposit known as “margin”.
2 Apr 2021
Resource curse
Glossary

Resource curse

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than th…
14 Jan 2021
Balance of payments
Glossary

Balance of payments

The balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
8 Jan 2021
Yield-curve control
Glossary

Yield-curve control

Yield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to …
25 Dec 2020

Most Popular

China owns a lot more gold than it’s letting on – and here’s why
Gold

China owns a lot more gold than it’s letting on – and here’s why

In a world awash with money-printing, a currency backed by gold would have great credibility. And China – with designs on the yuan becoming the world’…
21 Apr 2021
“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
House prices in the UK are still surging – here’s why it’ll probably continue
Property

House prices in the UK are still surging – here’s why it’ll probably continue

The latest UK house price data shows no letup in the country’s booming property market, with the biggest yearly rise since 2014. And there’s no end in…
22 Apr 2021