Interest Coverage Ratio

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Interest coverage is a useful ratio to determine the ability of a company to pay off its remaining debt. The lower the number, the more inadequate it becomes.

To calculate interest coverage, use a company's full year earnings before tax, add back its financial cost and divide by its interest expenses. The formula is as shown below:

It is ideal to judge both dividend yield and interest coverage of a stock to give a more balance view of its overall health. High dividend yield should not be the only criteria you use when sourcing for a reit. If it is unable to meet its interest obligation, it can be dangerous to you, the investor. If the interest coverage ratio of a company(as compared to its peers) is relatively low, it is showing signs of burden to its debt expenses.

Below is a table showing the top 10 highest dividend yielding reits and their interest coverage ratio:

As shown above, similar yielding stocks can have drastically different interest coverage ratios. By comparing the interest coverage ratio and dividend yield percentage of reits side by side like that, you should be able to get a better picture of what you are buying into. Hope you find this useful.