ACCA Financial Management (F9) Certification Practice Exam

What does the term 'Dividend Cover' refer to?

1. The number of years a dividend can be sustained

2. The number of times actual dividends could be paid out of current profits

3. The ratio of dividends to retained earnings

4. The comparison of dividend payments to total equity

The correct answer is: The number of times actual dividends could be paid out of current profits

The term 'Dividend Cover' refers specifically to the number of times actual dividends can be paid out of current profits. This measure provides insight into a company's ability to sustain its dividend payments based on its earnings. When calculating dividend cover, it is typically expressed as a ratio, comparing the net income available to shareholders to the total dividends paid. A higher dividend cover ratio indicates that a company earns significantly more than what it distributes as dividends, suggesting that it has ample profits to comfortably support its dividend payments. Conversely, a low dividend cover might alert investors to potential risks regarding the company's ability to maintain its dividend in the future. Understanding dividend cover is essential for assessing a company's financial health and the sustainability of its dividend policy. Investors often look for companies with a high dividend cover to ensure that their investments are safe in terms of Dividend payouts.