2 min read
Definition
Dividend cover is calculated as profit after tax divided by the dividends paid, showing how many times over the profit could fund the payout. A cover of 2 means the company earned twice what it paid out.
In plain terms
It's a sanity check on generosity. Cover comfortably above 1 means dividends are paid from real earnings; cover below 1 means you're paying out more than you made, dipping into reserves.
Why it matters for your company
Paying dividends the profit can't support drains reserves and can create an unlawful distribution. Keep an eye on cover before declaring. See salary vs dividends.
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