Dividend Coverage is a measure of the ability of an organization to pay dividends. Although dividend payments are usually discretionary, companies normally seek to maintain a reasonable level of dividend payout in line with the market expectations.

Generally, companies would aim to sustain a dividend cover of at least 2 times in order to avail adequate financing through retained earnings while providing a reasonable cash return on shareholder’s investment. A higher or lower dividend cover may be appropriate depending on the level of stability in earnings of the organizations.

Dividend cover consistently below 1.5 may suggest that the company might not be able to maintain the present level of dividends in case of adverse variation in profit in the future.

A high dividend cover may suggest that the company is retaining a higher portion of its earnings to meet its financing requirements which may result in higher dividend payouts in the future.