Fundamental Glossary / Dividend Metrics
Dividend Coverage Ratio
Earnings, or free cash flow, divided by the dividend. The inverse of the payout idea, stated as a multiple.
Formula
EPS / DPS, or free cash flow / total dividends.
What it means
Coverage of 2 means earnings are twice the dividend. There is room for a weaker year before the dividend is uncovered.
Free-cash-flow cover is the stricter test because it uses cash after capital expenditure.
How to read it
Coverage that stays above 1.5 on free cash flow through a normal down year is comfortable for most non-financial companies. Coverage that is only above 1 in the good years is a dividend at risk.
What to watch
A coverage ratio built on a one-time gain is not cover. Remove the gain and recompute before you call the dividend safe.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.