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

Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern Monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
21 Sep 2020
Price to sales ratio
Glossary

Price to sales ratio

A company's market cap divided by the company's annual sales (or revenue) gives us the price/sales ratio.
28 Aug 2020
Too embarrassed to ask: what is a p/e ratio?
Too embarrassed to ask

Too embarrassed to ask: what is a p/e ratio?

Find out how to use the price/earnings ratio (p/e ratio for short) – a useful starting place for investors looking to value a company.
26 Aug 2020
Stock split
Glossary

Stock split

A stock split increases the number of a corporation's issued shares by dividing each existing share.
21 Aug 2020

Most Popular

Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
UK post-Covid recovery stocks: these 20 companies could be set to rocket
Share tips

UK post-Covid recovery stocks: these 20 companies could be set to rocket

Finding stocks with the potential to rise tenfold or even further is far easier said than done. But the pandemic has produced the most promising backd…
22 Oct 2020
Why commodities could be the best investment for 2021
Commodities

Why commodities could be the best investment for 2021

There’s plenty for investors to worry about right now. But things will inevitably recover. And the sector most likely to do best when they do, says Jo…
22 Oct 2020