How the Dividend Safety and Strength Scores work

Measures: Dividends paid ÷ free cash flow, where FCF is averaged over the last 4 fiscal years (FCF = Operating Cash Flow − Capital Expenditures). A single year is unreliable for companies in heavy-investment phases — acquisitions or expansion can push one year's FCF negative even for a healthy business — so a 4-year average smooths one-time capex spikes. Operating-cash-flow payout is shown alongside as a cross-check.

Why it matters: Unlike EPS, free cash flow cannot be inflated by accounting choices. A large gap between FCF payout and OCF payout signals a heavy-capex year rather than a structurally impaired dividend — the two numbers together tell a more honest story than either alone.

Measures: Average of two independent sub-metrics: operating cash flow to total debt, and interest coverage (operating income ÷ interest expense).

Why it matters: A covenant breach raises the probability of a dividend cut in the following quarter by ~90%. Companies with heavy debt loads are forced to cut dividends even when operations are healthy.

Measures: How many of the last 5 years showed positive net income, and whether EPS is growing year over year.

Why it matters: DeAngelo, DeAngelo & Skinner (1992) found that only 1% of profitable firms cut their dividend, versus 51% of loss-making firms — a current-year loss is a near-necessary condition for a cut.

Measures: Dividends paid divided by net income — the traditional earnings-based payout ratio.

Why it matters: A secondary coverage check that complements FCF payout. A large divergence between EPS payout and FCF payout (>30 points) signals potential accounting quality issues and warrants extra scrutiny.

Measures: The number of consecutive calendar years in which the company has increased its annual dividend.

Why it matters: A long streak proxies for management commitment and business quality across multiple economic cycles. Note: even 30+ year streaks are not a guarantee — always pair with coverage metrics.

Measures: The coefficient of variation of EPS over the last 5 years (standard deviation ÷ mean EPS).

Why it matters: Highly cyclical companies with volatile earnings are structurally more likely to cut dividends at the bottom of a cycle, even when average earnings look adequate. This is the "Safety" component of the QMJ factor.

Measures: The average of two complementary profitability metrics — gross margin (pricing power) and gross profit relative to total assets (capital efficiency).

Why it matters: Together these two sub-metrics capture both a company's ability to command premium prices and how efficiently it converts its asset base into profit — the two dimensions of durable competitive advantage.

Measures: Average return on equity over 5 years. Excluded (score = N/A) when high ROE is driven by extreme leverage (D/E ratio > 3).

Why it matters: Consistent high ROE is Warren Buffett's primary quality filter. It also anchors the QMJ Profitability factor — one of the most robust and replicated return predictors in the academic literature.

Measures: Compound annual growth rate of dividends per share over the last 5 complete calendar years.

Why it matters: Hartford Funds / Ned Davis Research data (1973–2025) shows dividend growers returned 10.22% annualized vs −0.96% for dividend cutters. Dividend growth is a direct signal of management confidence in future earnings.

Measures: Annualized total return including price appreciation and all dividends received over the last 5 years.

Why it matters: A rising dividend on a falling stock is not value creation — it is capital being returned from a shrinking asset base. Total return confirms that dividend growth is backed by genuine business value creation.

Measures: Whether the current dividend yield is above or below the stock's own 5-year average yield — a relative valuation signal.

Why it matters: A yield above its own historical average suggests the stock may be relatively undervalued compared to its own history. This is a mean-reversion valuation signal, not an absolute one.

Measures: Compound annual growth rate of dividends per share over the last 10 complete calendar years.

Why it matters: Supported by practitioner evidence rather than academic research. Peter Lynch (Beating the Street, 1993): "The dividend is such an important factor in the success of many stocks that you could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 or 20 years in a row." M&G Investments data shows companies with 25+ consecutive years of dividend growth returned 136% cumulatively in the decade to 2011, vs 32% for the S&P 500. The 10Y window confirms the 5Y trend is structural and spans at least one full economic cycle.