Basic formula

• Note that dividend cover is the reciprocal of dividend payout ratio, which is calculated as DPS
  Dividend
  Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
  
  /EPS
  Earnings per share
  Earnings per share is the amount of earnings per each outstanding share of a company's stock.In the United States, the Financial Accounting Standards Board requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations,...
  
  .

• Generally speaking, a ratio of 2 or higher is considered safe—in the sense that the company can well afford the dividend—but anything below 1.5 is risky.

• If the ratio is under 1, the company is using its retained earnings
  Retained earnings
  In accounting, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or...
  
   from a previous year to pay this year's dividend.

• Typically the period covered is one year (aka time to market
  Time to market
  In commerce, time to market is the length of time it takes from a product being conceived until its being available for sale. TTM is important in industries where products are outmoded quickly...
  
  ). The investor can of course compute it for a longer or shorter time period.