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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
8 of the best houses for sale for around £500,000Some of the best houses for sale for around £500,000 – from a 19th-century stone farm cottage in North Yorkshire and a two-bedroom apartment in Edinburgh’s New Town to a converted Methodist chapel in Norfolk
-
What will the unravelling of US-China trade mean for the economy?What will a US-China decoupling mean for the global economy?
