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 4% Retirement Portfolio Service. 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

Please review our Disclaimer and Terms & Conditions pages before making any financial decisions.

© Copyright 2013 4 PERCENT PORTFOLIO LLC


Leave a Comment

4% Portfolio is Currently Yielding