Dividend cover is the ratio of company's earnings (net income) over the dividend paid to shareholders, calculated as earnings per share divided by the dividend per share.[1] So, if a company has earnings per share of $10.00 and it pays out a dividend of $2.00, the dividend cover is 5.0x.
Basic formula
DC = EPS/DPS
Note that dividend cover is a recipocate ratio to dividend payout ratio, which is calculated as DPS/EPS.
Generally speaking, a ratio of 2 or higher is considered safe—in the sense that the company can well afford the dividend—but anything below 1.5 is risky.
If the ratio is under 1, the company is using its retained earnings from a previous year to pay this year's dividend.[2]
