Dividend cover

The dividend cover can be calculated as:

Earnings per share  Net dividend per share

The dividend cover measures the company’s ability to pay or maintain a dividend. The higher the number, the greater the ability  to maintain the dividend. If a company is able to pay an increasing dividend over time, the company’s stock price will increase.

Example

Kinder Morgan is a company that has been paying increasing dividends. The snapshot below shows the dividends it has been paying from 2011.

Kinder Morgan
Credit: nasdaq

As you can see, dividends paid have been increasing.

Let us examine the share price of the company from 2011.

Share Price

Source: www.marketwatch.com

As you can see, the share price has been increasing till the end of 2014. The share price of Kinder Morgan started to drop from then as oil prices have decreased drastically. In general, if dividends increase, the share price of a traded company will increase.