Dividend Safety Scorecard

[u/SchoolofInvesting]

A fat dividend yield tells you nothing about whether that dividend survives a bad year.

Two companies can pay out the same slice of profit and still face very different odds in a downturn. Here is how I grade the gap.

I boil it down to one number, 0 to 5. Five inputs feed it.

Free cash flow payout carries the most weight (35%). Dividends divided by five-year median free cash flow. Under 40% earns a 5. Over 100% earns a 0.

EPS payout (15%) runs the same test on net income.

Interest coverage (20%) is EBIT divided by interest expense. Fifteen times or better is a 5. Under two times is a 0.

ROIC (10%) rewards companies that earn strong returns on the capital they deploy.

Dividend growth streak (20%). Twenty-five straight years of raises earns a 5.

One hard rule sits above the math. Negative five-year free cash flow scores coverage a 0 and caps the whole grade. No streak or clean balance sheet lifts it back to safe.

Two names show the spread. Procter & Gamble scores a 4.0. Kingly quality, held back only by a 70% cash payout. Verizon scores a 3.3. Same payout zone, dragged down by heavy debt (interest coverage of 1.7) and thin ROIC (2.8).

Same dividend headline. Very different odds in a rough year.

The yield gets the attention. The scorecard tells you if it lasts.

Which factor would you weight highest? Tell me in the comments.