What is dividend cover?
Dividend cover is the ratio of a company's net income to the dividend paid to shareholders, calculated as earnings per share divided by the dividend per share. It helps to indicate how sustainable a dividend is.
Where have you heard about dividend cover?
You might have heard recently that dividend cover for the UK's largest companies is at its lowest level since 2009 according to research by The Share Centre. Financial journalist Roger Aitken considered the implications in a piece for Forbes.
What you need to know about dividend cover.
The higher the dividend cover, the greater the possibility of earning the dividend and the bigger the chance of an even higher amount. For example, dividend cover of less than 1.5 can indicate a danger of a dividend cut, while more than 2 is seen as healthy. A company with a dividend cover of 1 times is paying out a dividend equal to all its net income. One with dividend cover of less than that means it has to borrow money to pay its shareholders - a scenario that might be unappealing to some investors.