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Discover how dividend coverage ratios are calculated for preference, equity, and fixed-interest shares to assess payout sustainability.
Last updated on: Sep 25, 2026
Dividend coverage ratios show how easily a company can pay dividends from its earnings. They vary across preference, equity, and fixed-interest shares. These ratios provide insight into dividend sustainability and financial stability.
The dividend coverage ratio shows how well a company's net income can cover total dividends (both preference and equity). It provides a broader view of dividend sustainability.
The total dividend coverage ratio measures net income relative to all dividends declared, rather than looking at preference or equity dividends in isolation.
Formula:
Dividend cover is another name for the dividend coverage ratio, commonly used in this form:
The ratio expresses dividend coverage on a per-share basis. When the underlying EPS and DPS figures are based on the same period and consistent definitions, it corresponds to the relationship between earnings and dividends in aggregate terms.
Example: If a company reports an EPS of ₹20 and pays a dividend per share of ₹5, the dividend cover is 20 ÷ 5 = 4 times.
The Preference Dividend Coverage Ratio (PDCR) shows how many times profit after tax covers the fixed preference dividend. A higher ratio reflects a greater degree of coverage.
See Preference Dividend Coverage Ratio for a full explanation of this ratio.
The preference dividend coverage ratio is calculated as follows:
Formula:
A company earns ₹50 lakh in profit after tax and owes ₹10 lakh in preference dividends.
PDCR = 50 ÷ 10 = 5
Profit after tax is five times the preference dividend payable.
The equity dividend coverage ratio (EDCR) measures how comfortably a company can pay dividends to ordinary shareholders after fulfilling preference obligations.
Formula (equity dividend coverage ratio formula):
For companies with debt and preference share capital, the interest and fixed dividend coverage ratio provides a combined measure of the earnings available to cover interest and preference dividend obligations.
Formula:
The ratio is relevant where a company has both interest-bearing debt and preference share capital and is used to assess the extent to which earnings cover these obligations before distributions to equity shareholders.
The following factors can affect the interpretation of coverage ratios:
Earnings volatility: Seasonal or cyclical businesses may experience fluctuations in earnings, which can affect coverage ratios.
Accounting adjustments: Accounting items such as depreciation can affect reported earnings and, consequently, ratios that use accounting profit in their calculation.
Industry characteristics: Coverage ratios can vary across industries because of differences in business models, earnings patterns, capital requirements and financial structures.
Dividend policy changes: For dividend-related coverage ratios, changes in dividend declarations, including one-time dividends, can affect the ratio for a particular period.
Comparing coverage ratios across multiple periods can provide context on how the ratio has changed over time
The following illustration applies all three formulas to one set of figures:
Company A Ltd. reports:
Net Profit After Tax: ₹60 lakh
Interest Expense: ₹10 lakh
Preference Dividend: ₹5 lakh
Equity Dividend: ₹15 lakh
Preference Dividend Coverage Ratio:
60 ÷ 5 = 12 times
Equity Dividend Coverage Ratio:
(60 – 5) ÷ 15 = 3.67 times
Interest & Fixed Dividend Coverage Ratio:
(60 + 10) ÷ (10 + 5) = 4.67 times
Dividend coverage ratios are used to assess the relationship between a company's earnings and its dividend payments. Different coverage ratios may be used to assess coverage of preference dividends and equity dividends separately, depending on the calculation methodology.
Summary of the above:
Dividend coverage ratios gauge a company's capacity to pay dividends from profits.
Preference dividend coverage relates earnings to preference dividend obligations
Equity dividend coverage relates earnings available to equity shareholders to equity dividend obligations.
Higher ratios reflect greater profit coverage of dividends.
Reviewer
The Preference Dividend Coverage Ratio is calculated by dividing Net Profit After Tax by the preference dividend payable for the relevant period. The ratio indicates how many times the company's profit after tax covers the preference dividend for that period.
Preference Dividend Coverage measures the relationship between profit after tax and dividends payable to preference shareholders, whereas Equity Dividend Coverage measures the relationship between profit available to equity shareholders and dividends payable to equity shareholders. Preference dividend coverage is calculated before deducting preference dividends from profit, while equity dividend coverage generally deducts preference dividends from profit before calculating the ratio.
The Fixed Dividend Coverage Ratio is a coverage measure that may consider both interest and preference dividend payments. The specific formula can vary by the methodology used. In some financial-management frameworks, a total coverage ratio compares profit before interest and tax with fixed charges such as interest and preference dividends.
Dividend cover is calculated by dividing a company's earnings per share (EPS) by its dividend per share (DPS). For example, an EPS of ₹20 and a DPS of ₹5 gives a dividend cover of 4 times.
A dividend coverage ratio below 1 means a company's profit after tax is lower than the dividend it has declared, so the dividend is not fully covered by current earnings for that period.
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