Chartered Wealth Manager Practice Exam 2025 - Free Practice Questions and Study Guide

The determination of dividend cover is specifically achieved by calculating the earnings per share (EPS) divided by the dividend per share (DPS). This ratio provides insight into a company's ability to generate enough earnings to pay its dividends. A higher dividend cover indicates that a company is earning significantly more than it pays out in dividends, which may suggest financial health and stability.

By using the earnings per share in the numerator, we measure the profit available to shareholders, while the dividend per share in the denominator represents the portion of those earnings that is distributed to shareholders as dividends. Thus, this calculation helps investors understand how many times the earnings can cover the dividends paid, providing clarity on the sustainability of a company's dividend policy.

Understanding the dividend cover is important for investors evaluating a stock's reliability as a dividend-paying investment, making it a critical metric in financial analysis and investment decision-making.