The dividend cover ratio gives an idea to external parties about the results of operation of a company that might drop leaving the amount of dividends to be paid from the result of the year unchanged or reduced.
Dividend cover ratio that is more than 1.0 (> 1.0) indicates that the ordinary dividends should be paid our for the year.
However, dividend cover ratio that is less then 1.0 (< 1.0) shows that the company is not earning enough profits to pay out as dividends. Therefore, the company is using past retained earnings to fund the dividends payment. This may be a danger sign for potential investors.
The dividend cover ratio is just the opposite of the payout ratio.
Payout ratio that is more than 1.0 (> 1.0) implies that retained earnings are being used to payout as dividends.