Dividend Cover
Dividend cover measures how many times a company can pay its dividend from earnings.
Dividend cover = EPS ÷ dividend per share. A cover of 2× means the company earns twice what it pays out — comfortable headroom. A cover below 1× means the dividend exceeds earnings and is being paid from reserves or debt, which is unsustainable unless temporary.
Falling dividend cover is an early warning signal that a cut is coming. Utilities, REITs and infrastructure companies often run lower cover ratios because their earnings are stable and predictable, making the risk more manageable.
In the UK, the statutory test for dividend payment is distributable reserves, not current earnings — so a company can pay a dividend through a loss year if it has sufficient retained earnings on the balance sheet.
Example
A company with EPS of £1.00 paying a dividend of £0.40 per share has dividend cover of 2.5×.
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