Dividend cover

Dividend cover is a way to measure how safe and sustainable a company's dividend payments are. Imagine your Mom gives you some money every week to buy candy. If she gives you more money than you need, you can save some for later, right? But if she doesn't give you enough, you won't have enough money to buy all the candy you want.

Companies also give out money (called dividends) to their shareholders. Dividend cover is a way to see if a company has enough money to keep giving out dividends in the future. It's like checking if your Mom has enough money to keep giving you candy every week.

To calculate dividend cover, you need to know two things: how much money the company made (called profit) and how much money it gave out in dividends. Let's say the company's profit was $100 and it gave out $20 in dividends. To calculate dividend cover, we divide the profit by the dividends:

$100 (profit) / $20 (dividends) = 5

The dividend cover is 5. This means the company was able to give out five times more in dividends than it made in profit. That's really good! It means the company has a lot of money left over to reinvest in the business or save for a rainy day.

But what if the company's profit was only $30 and it gave out $20 in dividends? Let's calculate the dividend cover again:

$30 (profit) / $20 (dividends) = 1.5

The dividend cover is only 1.5. This means the company is only able to give out 1.5 times more in dividends than it made in profit. That's not very good. It means the company might not have enough money to keep giving out dividends in the future.

So, dividend cover is like checking if a company has enough money to keep giving out dividends. If the dividend cover is high, it means the company is doing well and is likely to keep giving out dividends. If the dividend cover is low, it means the company might have to reduce or even stop giving out dividends.