A Review Of Dividend Safety Scores 

Dividend safety serves as the foundation for conservative income investing and stress-free retirement living.

Companies that are able to continue paying and growing their dividends help us meet our investment goals and build wealth over time.

We created Dividend Safety Scores to help investors build safe dividend portfolios and avoid companies that are most at risk of cutting their dividends.

The following information is from our new Dividend Safety Scores guide, which can be found under the Resources menu for future reference.

Dividend Safety Scores
Photo by stevepb (Pixabay)

What are Dividend Safety Scores?

Our Dividend Safety Score measures a company’s ability to continue paying its current dividend and helps investors find the safest sources of income for their portfolios.

Dividend Safety Scores analyze the most important metrics from a company’s financial statements and answer the question, “Is the current dividend payment safe?”

In many ways, Dividend Safety Scores can be thought of as being similar to “bond ratings” by credit agencies except they are applied to dividends rather than debt.

Brian Bollinger created Dividend Safety Scores. Brian is a Certified Public Accountant and worked as an equity research analyst at a multibillion-dollar investment firm prior to starting Simply Safe Dividends (more on his background here).

How are Dividend Safety Scores Calculated?

Our goal is to never own a business that reduces its dividend. Companies usually give off a number of warning signs before they actually cut their dividends.

The companies most likely to cut their dividends usually have some combination of high payout ratios, weak free cash flow generation, declining sales and earnings, weak balance sheets, cyclical operations, and no proven commitment to paying and growing dividends over time.

Dividend Safety Scores take into account more than a dozen fundamental factors that influence a company’s ability to continue paying dividends.

They are meant to be a much more comprehensive measurement of risk than simply looking at a company’s dividend growth streak (e.g. 23 years) and payout ratio.

Here are some of the main factors we use to assess a dividend’s safety:

  • Earnings and free cash flow payout ratios
  • Debt levels and coverage ratios
  • Recession performance
  • Dividend longevity
  • Industry cyclicality
  • Free cash flow generation
  • Business model volatility
  • Near-term sales and earnings growth
  • Return on invested capital

Here is a rough estimate of how much each group of factors impacts our Dividend Safety Scores:

  1. Income Statement / Coverage metrics: 35-45%
  2. Balance Sheet / Credit metrics: 25-35%
  3. Dividend History / Longevity: 10-20%

No quantitative system is ever going to be 100% accurate, but Dividend Safety Scores help income investors identify and avoid companies that might be riskier than they desire – without needing to get into the weeds of balance sheets and income statements (although we always encourage it).

Interpreting Dividend Safety Scores

Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak.

A stock’s Dividend Safety Score represents its safety rank relative to all of the other dividend-paying stocks in the market.

For example, a Dividend Safety Score of 100 means the stock scored in the top 1% of all dividend stocks for safety and has an extremely reliable dividend.

Alternatively, a score of 1 indicates that the company scored lower than 99% of all other dividend stocks for safety and is one of the most likely companies to cut its dividend in the future.

The table below indicates how investors should interpret Dividend Safety Scores:

Dividend Safety Scores

During the financial crisis (2008-09), roughly one-third of dividend-paying companies in the S&P 500 cut their dividends. Ideally all of those companies would have scored in the bottom 30-40% for Dividend Safety prior to their cuts.

By sticking with firms that score at least 50-60+ for safety, a lot of pain can potentially be avoided for income investors.

Dividend Safety Scores: Track Record

Since their launch in mid-2015, Dividend Safety Scores have flagged a number of major companies as high risk stocks before they cut their dividends.

As seen below, Kinder Morgan, ConocoPhillips, BHP Billiton, National Oilwell Varco, Noble Energy, Devon Energy, CONSOL Energy, and Anadarko Petroleum all scored in the bottom 10-20% for Dividend Safety and had an average score of 5 at the time of their dividend cut announcements.

Ticker Company Name Dividend Cut Announcement Date Dividend Safety Score Dividend Cut % Link
APC Anadarko Petroleum 02/09/2016 1 -81 Link
BHP BHP Billiton 02/23/2016 5 -87 Link
CNX CONSOL Energy 02/29/2016 0 -100 Link
COP ConocoPhillips 02/04/2016 17 -66 Link
DVN Devon Energy 02/16/2016 1 -75 Link
KMI Kinder Morgan 12/08/2016 8 -75 Link
NBL Noble Energy 01/26/2016 3 -44 Link
NOV National Oilwell Varco 04/11/2016 5 -89 Link

In late April 2016, we began tracking dividend cut announcements for all companies that had Dividend Safety Scores in our database.

Since April 2016, companies reducing their dividends had an average Dividend Safety Score of 16 at the time of their announcements.

Companies that cut their dividends by at least 50% had an average Dividend Safety Score of 6.

The table below shows each company’s Dividend Safety Score at the time the dividend cut was announced, the magnitude of the cut, and a link to the original announcement from the company:

Ticker Company Name Date of Cut Safety Score Dividend Cut % Link Note
AGNC American Capital Agency 07/27/2016 23 -10 Link Volatile market conditions and unfavorable rates
AINV Apollo Investment 08/04/2016 23 -25 Link High leverage; restructuring strategy
APC Anadarko Petroleum 02/09/2016 1 -81 Link Weak energy markets; preserve cash
BHP BHP Billiton 02/23/2016 5 -87 Link Weak commodity markets
CG Carlyle Group 04/27/2016 10 -10 Link Challenging market conditions
CMO Capstead Mortgage 06/09/2016 23 -12 Link
CNX CONSOL Energy 02/29/2016 0 -100 Link Suspended dividend; weak natural gas and coal prices
COP ConocoPhillips 02/04/2016 17 -66 Link Weak energy markets; preserve cash
CPSI Computer Programs 08/04/2016 13 -47 Link Moved to a variable dividend policy in response to fluctuation in sales and profits
CRT Cross Timbers Royalty 05/20/2016 26 -13 Link Hurt by lower oil prices
CRT Cross Timbers Royalty Trust 07/19/2016 29 -11 Link Lower oil and gas volumes
CYS CYS Investments 06/08/2016 15 -4 Link
DAKT Daktronics 06/17/2016 8 -40 Link Lowered regular dividend and added special dividend (less predictable)
DVN Devon Energy 02/16/2016 1 -75 Link Challenging energy markets; protect balance sheet
EEI Ecology and Environment 07/18/2016 82 -17 Link Micro cap decided to invest more for growth; company is healthy
GG Goldcorp 02/25/2016 29 -67 Link Weak production levels, slumping commodities
HWCC Houston Wire & Cable 08/09/2016 18 -50 Link Weak industrial demand and depressed energy markets
JCS Communications Systems 08/18/2016 5 -75 Link Losing money; wants to direct more resources to growth
KMI Kinder Morgan 12/08/2016 8 -75 Link Preserve capital
MARPS Marine Petroleum Trust 05/20/2016 3 -18 Link Hurt by lower oil prices
MARPS Marine Petroleum Trust 08/19/2016 6 -41 Link Hurt by lower oil prices
MCC Medley Capital 08/09/2016 20 -27 Link Falling net investment income (BDC)
MEMP Memorial Production 04/26/2016 2 -70 Link Weak industry conditions, tighter credit, too much leverage
MTR Mesa Royalty Trust 08/19/2016 14 -36 Link Hurt by lower gas prices
MUR Murphy Oil 08/03/2016 4 -29 Link Depressed commodity prices
NBL Noble Energy 01/26/2016 3 -44 Link Weak energy markets; preserve cash
NOV National Oilwell Varco 04/11/2016 5 -89 Link Deteriorating market conditions; needed to improve future cash flow and preserve capital
NRT North Eur. Oil Royalty Trust 07/29/2016 18 -38 Link Delayed royalty payments
POT Potash 07/28/2016 9 -60 Link Fertilizer markets remain weak
SBR Sabine Royalty Trust 06/03/2016 27 -38 Link Lower oil and gas volumes and prices
SJT San Juan Basin Royalty Trust 05/20/2016 17 -32 Link Hurt by lower gas prices
SJT San Juan Basin Royalty Trust 08/22/2016 12 -34 Link Hurt by lower gas prices
UAN CVR Partners 07/28/2016 18 -37 Link Company was losing money
UG United-Guardian 05/13/2016 19 -30 Link Sales down nearly 50% on marketing problems in China
WMB Williams 08/01/2016 3 -69 Link Weak energy markets; needs to protect credit rating
MFIN Medallion Financial 08/02/2016 3 -80 Link Underperforming loan portfolio; weak liquidity