1. What is Dividend Coverage Ratio?

The Dividend Coverage Ratio (DCR) measures the extent to which a company's earnings cover its dividend payments. It indicates how many times a company could pay dividends to its shareholders from its net income after accounting for preferred dividends.

2. How Does the Calculator Work?

The calculator uses the Dividend Coverage Ratio formula:

Where:

• \( DCR \) — Dividend Coverage Ratio
• \( NI \) — Net Income ($)
• \( PD \) — Preferred Dividend ($)
• \( CD \) — Common Dividend ($)

Explanation: The formula calculates how many times a company can pay its common dividends from its earnings after paying preferred dividends.

3. Importance of Dividend Coverage Ratio

Details: A higher DCR indicates a company has sufficient earnings to cover dividend payments, suggesting financial stability and sustainability of dividend payments. A ratio below 1 indicates the company is paying more in dividends than it earns.

4. Using the Calculator

Tips: Enter net income, preferred dividend, and common dividend amounts in dollars. All values must be valid (non-negative, common dividend > 0).

5. Frequently Asked Questions (FAQ)

Q1: What is a good Dividend Coverage Ratio?
A: Generally, a DCR above 2 is considered healthy, indicating the company can comfortably cover its dividend payments. A ratio between 1.5-2 is acceptable, while below 1.5 may indicate potential risk.

Q2: How does DCR differ from dividend payout ratio?
A: While DCR measures how many times dividends are covered by earnings, payout ratio shows what percentage of earnings is paid out as dividends.

Q3: Why subtract preferred dividends?
A: Preferred dividends have priority over common dividends, so they must be paid first from net income before common dividends can be considered.

Q4: Can DCR be negative?
A: Yes, if a company has net income less than preferred dividends, the numerator becomes negative, indicating the company cannot even cover preferred dividends from current earnings.

Q5: How often should DCR be calculated?
A: DCR should be calculated quarterly alongside financial statements to monitor the sustainability of dividend payments over time.