Interpret with care
- Some businesses -- such as utilities, for instance -- can quite happily operate with lower levels of dividend cover than more cyclical businesses.
- Other businesses -- such as REITs -- must pay out a fixed proportion of earnings as dividends, so again a low level of dividend cover is the norm.
- Still other businesses have very high levels of dividend cover, because they are growing -- and therefore retaining earnings for future investment -- rather than paying them out as dividends.
- a ratio of close to one is definitely the danger zone.
- A ratio much bigger than two indicates a certain parsimony.
- Personally speaking, a ratio of 1.5-2.5 is usually what I'm looking for.
|Company||Forecast yield %||Full-year earnings per share||Dividend||Dividend cover|
|Standard Life (LSE: SL)||6.6%||13p||13.8p||0.9|
|United Utilities (LSE: UU)||5.3%||35.3p||32.1p||1.1|
|Hargreaves Lansdown (LSE: HL)||4.7%||20.3p||18.9p||1.1|
|Admiral (LSE: ADM)||7.7%||81.9p||75.6p||1.1|
|Aviva (LSE: AV)||10.1%||5.8p||26p||0.2|