Dividend Coverage Ratio

Dividend Coverage Ratio states the number of times an organization is capable of paying dividends to shareholders from the profits earned during an accounting period.



Dividend cover in respect of ordinary share capital may be calculated as follows:

Dividend Cover Ratio	=	Profit after tax - Dividend paid on Irredeemable Preference Shares
		Dividend paid to Ordinary Shareholders

Dividend Coverage Ratio indicates the capacity of an organization to pay dividends out of profit attributable to the share holders. A dividend cover of 3 implies that a company has sufficient earnings to pay dividends amounting to 3 times of the present dividend payout during the period. When calculating dividend coverage for ordinary share capital, it is necessary to deduct any dividend paid on irredeemable preference shares from the net profit earned during the accounting period in order to arrive at the earnings attributable to ordinary share holders. Dividend on redeemable preference shares is already deducted from the income statement as interest expense (finance cost) and hence no further adjustment is required in its respect in the dividend cover calculation.

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