Understanding the Dividend Cover Ratio

The dividend cover ratio is a valuation multiple that is commonly used when evaluating the financial health of a company. This is a ratio that looks at the relationship between the dividends that are paid by a company and the earnings that it generates. Here are the basics of a dividend cover ratio.

Dividend Cover Ratio

In order to calculate the dividend cover ratio, you take the earnings per share of the company and divide that by the annual dividend per share. 

Significance

As an investor, you can gain a lot of information from the dividend cover ratio. By looking at this ratio, you will be able to tell if the company is struggling to pay its dividends or if it is easily meeting this obligation. Investors ultimately like to see companies that can easily meet their obligations when it comes to paying dividends.

Even though this is an important financial ratio, it is not the only thing that you should look at. These numbers could be affected by many different things, and you have to look at the whole picture when you are evaluating a company. By looking at this ratio and several others, you can get a more realistic picture of the company.

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