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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. 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.
DC = EPS/DPS
- Note that dividend cover is the reciprocal of 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.
- Typically the period covered is one year (aka time to market). The investor can of course compute it for a longer or shorter time period.
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