Reliability of dividends

There are two metrics which are commonly used to gauge the sustainability of a firm's dividend policy.

Payout ratio is calculated by dividing the company's dividend by the earnings per share. A payout ratio of more than 1 means the company is paying out more in dividends for the year than it earned.

Dividend cover is calculated by dividing the company's cash flow from operations by the dividend. This ratio is apparently popular with analysts of income trusts in Canada.

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