Dividend Coverage Ratio

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 17, 2023

The dividend coverage ratio indicates the number of times that a dividend is covered by available profit. It is calculated separately for each class of shares.


To calculate the dividend coverage ratio for preference shares, use the following formula:

Dividend Coverage Ratio Formula For Preference Shares

For ordinary (common) shares, apply this formula:

Dividend Coverage Ratio Formula For Ordinary Shares


Consider the following information relating to a company:

  • Profit before tax: $480,000
  • Corporation tax rate: 50%

Required: Calculate the dividend coverage ratio for preference shareholders and ordinary (common) shareholders.


For preference shareholders:

Dividend coverage ratio = (480,000 - 240,000)/$15,000

= 16 times

For ordinary (common) shareholders:

Dividend coverage ratio = ($480,000 - $240,000 - $15,000)/$25,000

= 9 times


A high dividend coverage ratio shows that a company has the ability to pay similar or higher dividends in the future.

A low dividend coverage ratio, on the other hand, shows that even a small decrease in the company's profit will result in a reduction in the dividend rate—in other words, the dividends may not be safe.

Obviously, companies with high dividend coverage ratios typically command better prices if they are listed on a stock exchange.

Dividend Coverage Ratio FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.