The dividend coverage ratio calculates the dividend potential of the company. A company pays its shareholders dividends only when it makes a profit. This statement is applicable to the common stockholders of the company, but what about preference shareholders? The company can put off the distribution of dividends to preferred shareholders but cannot call it off. It is a compulsory payment. Therefore, this ratio is more important for preference shareholders. The dividend coverage ratio calculator calculates how often the dividend can be paid out. In other words, how many times are the earnings of the company with regard to its standard dividend payout pattern?
The formula for calculating the dividend coverage ratio is as follows:
| Dividend Coverage Ratio (For Preference Shareholders) = Net Income / Dividend for Preferred Stock |
| Dividend Coverage Ratio (For Equity Shareholders) = (Net Income – Dividend for Preferred Stock) / Dividend for Common or Equity Shareholders |
Dividend Coverage Ratio Calculator
How to Calculate using a Calculator?
The following three variables are required to be inserted into the dividend coverage ratio calculator to get the dividend coverage ratio for both preferred stocks as well as the common stock quickly.
- Net Income – The net income refers to the earnings of the company left after deducting all the expenses plus taxes. This can also be referred to as earnings after interest and taxes. The net income amount differs for both preferred stockholders and equity shareholders. The income obtained after paying taxes is the net income for preference shareholders, while the earnings left after honoring the preferred dividend is the net income for equity shareholders.
- Dividend for Preferred Stock – Enter the figure of dividend allowed for the preference capital of the company.
- Dividend for Common Stock – Enter the figure of dividend allowed for equity capital, or we can say, the dividend for common shareholders of the company.
