The amount by which a company's earnings exceed its dividends. The higher a company's earnings are relative to its dividends, the better its dividend coverage and the more flexibility the company has. A company with good dividend coverage has the option to raise the dividend if it wishes and likewise may still pay the same dividend with little difficulty if earnings decline. Maintaining adequate dividend coverage is especially important if the company has issued a lot of preferred stock, which carries guaranteed dividends.
The extent to which a firm's net income supports the company's total dividend payments. For example, a utility earning $5.00 per share and paying a dividend of $4.79 per share has relatively weak dividend coverage. Poor coverage permits a firm's management to enjoy less flexibility to raise dividends or to keep them at the same level in the event that earnings decline. See also preferred dividend coverage.