This aims to answer the question, how easy it will it be for a company to continue to pay out the current dividend? It does this by working out the ratio of company profits to the amount of dividends paid. For example, if a company had £2m of profits, and paid out £1m in dividends, then the dividend cover ratio would be 2, as £2m / £1m = 2.

This means that for every £1 the company pays out, it has another spare to cover the dividend payment. Dividend Cover of less than 1.5 may indicate a danger of a dividend cut while more than 2 is viewed as healthy.

The inverse of dividend cover is the Payout Ratio.

As we define the Dividend from the Cashflow statement, that means that it's a negative cash-flow item so the Dividend Cover is negative and so is the Payout Ratio, so it's important to be aware of this when screening. This is measured on a TTM basis.