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The following point system is used to evaluate the safety of a stock’s current dividend. This analysis uses available metrics and data found online and through our stock database. The point of this analysis is to assign a rating as well as point out a company’s current strengths as well as weaknesses related to its ability to pay a dividend. It should not solely be used to determine whether to buy a stock, but it should help point out specific areas of a company’s financials that should be investigated further.

This analysis is used to help determine stocks that we recommend for our Model Retirement Portfolio. Please feel free to contact us to learn more about this analysis or our Retirement Portfolio Service.

For a list of all of our Dividend Safety Analyses, click here.

Number of consecutive years a dividend has been paid

  • 1 point for more than 9 years
  • 2 points for more than 29 years

Number of consecutive years a dividend has been increased

  • 1 point for more than 9 years
  • 2 points for more than 29 years

Annual dividend cuts in the past 10 years

  • -2 points for each cut

Free cash flow (FCF) payout ratio - Free cash flow provides better insight about how much cash is generated by a company than earnings or net income. Dividing dividends paid by free cash flow tells us how much of the cash made by a company is being paid out as dividends to shareholders. The lower the ratio the better when determining dividend safety.

  • 1 point for most recent FY less than 75%, -1 point for > 75%
  • 1 point for five year average less than 75%, -1 point for > 75%

Negative free cash flows in the past 10 years – Negative free cash flow means a company paid out more cash than it took in for the year. This is before taking into consideration the amount of cash paid out in the form of dividends.

  • -1 point for each year there was a negative free cash flow

Amount of cash on hand to cover annual dividend payment

  • 1 point for every year a company’s dividend is covered by current cash on hand
  • -1 point if there is less cash on hand than one year’s dividend payment

Most recent FY profit margin vs. five year average - This helps us see if competition or other variables are eroding the company’s profitability.

  • 1 point if most recent FY is more than or within 5% of the five-year average profit margin
  • -1 point if most recent FY profit margin has decreased more the 5% vs the five-year average

Debt to total capital -  Ratio used to determine how levered a company is.

  • 1 pt if less than or equal to 60%
  • -1 pt if more than 60%

Current ratio - Ratio used to determine how much liquidity a company has.

  • 1 pt if greater than or equal to 1.0
  • -1 pt if less than 1.0

Quick ratio - Ratio used to determine if a company has sufficient liquid assets to meet short-term operating needs.

  • 1 pt if greater than or equal to 1.0
  • -1 pt if less than 1.0

Interest coverage ratio -  Ratio used to determine how easily a company can pay interest on outstanding debt.

  • 1 pt if greater than or equal to 1.5
  • -1 pt if less than 1.5

S&P Bond rating of the stock

  • 1 pt for “BBB- and up” – A rating of BBB- and up is considered Investment Grade and allows a company to borrow at lower rates via bond issuance.
  • -1 pt for “BB+ and lower” – A rating of BB+ or lower is considered a more risky investment as a company’s bonds will be deemed “Junk Bonds” which forces it to borrow money at higher interest rates.

ISS Governance QuickScore – Score used to identify potential governance risk – the lower the score the better.

  • 1 pt for less than or equal to 5
  • -1 pt for greater than 5

Are you a retired investor looking for a safe and reliable income stream that generates at least 4% income a year? The 4% Portfolio Retirement Service has built just that! Our portfolio is based around financially sound corporations spread across multiple industries that pay a safe and increasing dividend to their shareholders each year.  Find out more

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