We tested the claim "Dividend cover below 1.5 times predicts a cut"

What we found

Cover below 1.5: 21.9% cut their dividend within 12 months, across 483 observations. Cover of 2 or more: 11.6%, across 733. The gap is 10.3 percentage points, with a 90% range of 5.6 to 16.1.

How the test worked

• Cover below 1.5. Every company in the universe, where payout ratio (dividends as a share of earnings) > 0.6667 on each date.
• Cover of 2 or more. Every company in the universe, where payout ratio (dividends as a share of earnings) <= 0.5 on each date.
• Universe: UK-listed companies with a market value of at least $2bn, observed every six months from 2015 to 2024.
• A cut means the dividends paid over the next 12 months fell more than 2% below the 12 months before, with one-off special dividends excluded.
• The test was registered as number 5 before it ran, with the effect it had to show set in advance.

Data quality

• Rows where two independent yield measures disagreed by more than 2x: 376.
• Rows above the 25% yield ceiling: 14.
• Dividend payers whose yield could not be cross-checked: 5.
• Cover below 1.5: 6 observations had no share price a year later (taken over or delisted). A takeover ends the dividend, so these can count as cuts.
• Cover of 2 or more: 6 observations had no share price a year later (taken over or delisted). A takeover ends the dividend, so these can count as cuts.

Limits

• Market value above $2bn approximates, but is not, FTSE index membership.
• Companies that delisted have partial price histories, so the survivor correction is incomplete.
• This tests what happened to dividends, not what an investor would have earned.

Data

Download the per-period data (CSV). Dataset 2b6b505eef56, gate rules version 1.