Financial Glossary
Dividend Coverage Ratio
The dividend coverage ratio measures how many times a company could pay its dividends out of available earnings, typically calculated as net income divided by total dividends paid. A higher ratio means dividends are well covered by profits, while a ratio near or below one signals the company is paying out most or all of what it earns. It is a quick gauge of how sustainable a dividend is.
Problem & Application
For owners who take distributions or pay dividends from a closely held business, the coverage ratio is a reality check on whether those payouts are supported by actual earnings or are quietly draining the company. A consistently thin ratio can mean distributions are outpacing profit, putting cash reserves and reinvestment at risk. Tracking it over time helps set a payout level the business can sustain.
In Short
The dividend coverage ratio shows whether a company is paying dividends it can afford, making it a useful check on payout sustainability.