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%
  • Dividend to preference shareholders: $15,000
  • Dividend to ordinary shareholders: $25,000

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.

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