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Dividend cover


Dividend payments come directly from a company’s earnings and investors look at both the dividend and the earnings per share to see how affordable a dividend is.

  • If a company is paying a dividend of 10p a share, for example, and its earnings per share are 30p, the dividend is described as being ‘three times covered’;
  • If the earnings are 20p, the dividend will be twice covered;
  • If the earnings are 5p however, the dividend is described as ‘uncovered’.

Investors tend to feel more at ease when a dividend is comfortably covered by earnings although there are occasions when an uncovered dividend is considered acceptable – if a business is about to win a large contract, for instance, and the stockmarket knows this to be the case.

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