Bob Davies •
August 27, 2023
How to calculate dividend cover
Dividend cover, which is also called the dividend coverage ratio, is a key financial measure that helps investors figure out if a company's dividend payments are likely to keep coming. It shows if a company is making enough money to pay dividends to its owners. Investors can make better choices about their investments if they know how to calculate dividend cover. In this piece, we'll explain what dividend cover means and show you step-by-step how to discover it out.
How does dividend cover work?
Dividend cover is a way to figure out if a company's earnings are enough to pay its dividends to owners. In simple terms, it shows how much of a safety cushion a company has in its ability to keep paying dividends. A higher dividend cover ratio means that a company has more room to continue paying dividends even when earnings are low.
On the other hand, a lower ratio could mean that a company's dividend payments could be in danger if profits go down. You will find more detailed information on this topic in our other article What is dividend cover?
Computing dividend cover
To figure out dividend cover, you have to compare a company's profits to the payments it gives out. This is how to calculate dividend cover:
Earnings per share (EPS) / Dividends per share (DPS) = Dividend Cover Ratio
We have a handy tool that will allow you to do the calculation in seconds, please check our Dividend cover calculator.
Here's a breakdown of the components used in the formula:
Earnings per Share (EPS): Earnings per share represents a company's net profit divided by the number of outstanding shares. It indicates how much profit each share of the company's stock represents.
Dividends per Share (DPS): Dividends per share is the total amount of dividends paid by the company divided by the number of outstanding shares. It represents the portion of earnings distributed to shareholders as dividends.
Calculation step by step
Follow these steps to figure out payout cover:
EPS stands for "earnings per share." From the company's financial records, you can figure out its net profit. To figure out EPS, divide the net profit by the number of shares that are still in circulation.
Dividends per Share (DPS): Get the total dividends that the company has given out. To figure out DPS, divide the total rewards by the total number of shares that are still out there.
Divide EPS by DPS to use the formula. This is the dividend cover calculation we talked about earlier.
Dividend cover ratio: how to read It
The dividend cover ratio shows how many times a company's revenues are enough to pay its dividends. If the ratio is higher than 1, it means that the company makes more than enough money to cover its payouts. A good safety margin is shown by a ratio that is much higher than 1.
On the other hand, a number below 1 means that the company's earnings may not be enough to cover its dividend payments, which could make people worry about the dividend's future.
Dividend cover is a basic metric that shows how well a company can keep making dividend payouts. Investors can figure out if a company's earnings are strong enough to cover its dividends by figuring out the dividend cover ratio.
Keep in mind that a higher dividend cover ratio is usually a good thing, t's essential to consider other factors such as industry trends, company growth prospects, and overall financial health when evaluating dividend sustainability.
Adding the calculation of dividend cover to your set of tools for evaluating investments can help you make better choices and navigate the complicated world of dividend investing. As with any other financial metric, using dividend cover along with a thorough study of a company's finances will help you get a better idea of whether or not it is a good investment.