Does low dividend cover predict a cut? We tested it on ten years of UK data

Dividend cover is the number UK income investors check most often after yield. It tells you how many times over a company's earnings would pay its dividend. The usual rule says cover of 2 or more is comfortable and cover below 1.5 is a warning.

We tested that rule on ten years of UK data. Companies with cover below 1.5 cut their dividend within 12 months 21.9% of the time. Companies with cover of 2 or more cut 11.6% of the time.

What we tested

We took every UK-listed company worth at least $2bn and looked at it every six months from 2015 to 2024. Each company on each date counts as one observation. On each date we worked out its dividend cover from the earnings and dividends of the past year, as they stood on that day.

We compared two groups. One had cover below 1.5, which means it paid out more than two thirds of its earnings. The other had cover of 2 or more, paying out half its earnings or less. Companies in between were left out, and so were loss-making companies, because a company with no earnings has no cover to measure.

For every observation we checked whether the company paid less in dividends over the next 12 months than over the 12 months before, by more than 2%. One-off special dividends were left out on both sides. We dropped the three observation dates whose following year ran through the pandemic dividend suspensions, and 395 observations whose yield data failed our checks.

The test was written down before it ran, along with the size of effect the cover warning would need to show: 10 percentage points. It is test 5 in our list of every strategy we have tested.

What we found

The rates come from 483 observations of companies with cover below 1.5 and 733 with cover of 2 or more. The gap is 10.3 percentage points. A thinly covered dividend was cut 1.9 times as often.

The gap appeared in both halves of the decade, and it was larger in the second half than the first. It also held when we relaxed the data checks. Allowing for chance, we are 90% confident the true gap lies between 5.6 and 16.1 points. That range sits well clear of zero, though its lower end is below the 10 points we set as the bar in advance.

What it means for your income

Take Helen, a hypothetical retired investor who draws an income from UK shares held in a stocks and shares ISA. Say that at any point in our test she had owned some thinly covered companies and some well covered ones, and held them for a year.

About one in five of her thinly covered holdings would have cut. About one in nine of the well covered ones would have. Counting cuts and rises together, the typical thinly covered company raised its dividend by a median of 2.1% over the year, against 6.3% for the typical well covered one.

What this test does not tell you

• Returns. It measured dividends. A share can cut and still be a good buy if the price had already fallen to reflect it. Total returns need a separate test.
• Loss-making companies. A company that lost money has no cover in our data, so it sits in neither group. Some of the weakest dividends belong to companies in that position.
• One bad year. Cover uses one year of earnings. A one-off write-down can push a healthy company below 1.5 for a year without putting its dividend at risk.
• Takeovers. A company that is bought out stops paying, and that counts as a cut here. Of the observations counted as cuts, 3 in the thinly covered group and 5 in the well covered group had no share price a year later.

The method note lists every exclusion and lets you download the data behind the chart.

How to check cover before you buy

When a UK dividend share's cover is below 1.5, find out why. Check whether earnings fell for a one-off reason, whether free cash flow pays the dividend even when earnings do not, and whether the company is borrowing to keep paying. The Dividend Safety Score checks each of these for a company.

Frequently asked questions

What is dividend cover?

Dividend cover is a company's earnings per share divided by its dividend per share. Cover of 2 means the company earned twice what it paid out. Cover below 1 means it paid out more than it earned that year.

Does low dividend cover mean a cut is coming?

Not for certain, but the odds rise. In our test of UK companies worth at least $2bn from 2015 to 2024, those with cover below 1.5 cut their dividend within 12 months 21.9% of the time. Those with cover of 2 or more cut 11.6% of the time.

What is a good dividend cover ratio?

Cover of 2 or more is the figure most UK guides call comfortable, and cover below 1.5 the point where they start to worry. In our data the gap between those two groups was 10.3 percentage points, so the rule of thumb held up on ten years of UK results.

The takeaway

Between 2015 and 2024, large UK companies with dividend cover below 1.5 cut their dividend within a year 21.9% of the time, against 11.6% for those with cover of 2 or more.

If a UK share you hold for income has thin cover, look into why before you rely on the payment.

This is research on past data, not financial advice. Past dividends say nothing certain about future ones, and your own circumstances matter.