Dividend Coverage Ratio
Quick definition: The dividend coverage ratio shows how many times a company's earnings (or free cash flow) could pay its dividend. Higher means safer.
In plain English
Dividend coverage = earnings per share ÷ dividend per share
It is the opposite view of the payout ratio.
Example
A company earns $3 per share and pays a $2 dividend. Coverage is 3 ÷ 2 = 1.5×. Its payout ratio is about 67%.
Why it matters
A coverage ratio near 1× means almost all profit goes to the dividend, leaving little cushion. Many investors prefer a comfortable margin, though what is reasonable depends on the industry.
Common mistakes
- Using earnings when cash flow tells a different story.
- Looking at a single year.
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