Dividend stock scoring: the Income model

Dividend investors want cash paid out regularly. The trap is chasing the highest yield: a yield is the dividend divided by the price, so it rises when the price falls, including when the market doubts the dividend will last.

A sturdier approach looks at several things together. Is the yield attractive today? Has the payment grown, so it can keep up with rising prices? Do profits and cash comfortably cover it? Well-known examples of dividend-growth thinking include the S&P 500 Dividend Aristocrats, the members of that index that have raised their dividends for at least 25 consecutive years. The Income model asks the same kinds of questions with the data Stock Meadow has.

Each dividend payer receives a 0–100 score on four measures, and the scores are blended with fixed weights (a total of 9):

• Dividend yield (weight 3): dividends paid per share over the last twelve months divided by the share price. Higher scores higher.
• Dividend growth (weight 2): compound annual growth of dividends per diluted share over the last three fiscal years. Higher scores higher.
• Payout ratio (weight 2): dividends divided by net income. Scores 100 between 25% and 65%, and loses 1.5 points for every percentage point outside it, so both stingy and stretched payouts lose points.
• Dividend cover by free cash flow (weight 2): latest fiscal-year free cash flow divided by dividends paid. Higher scores higher.

Yield, growth and cover are ranked against the other stocks as percentiles: the best scores 100, the worst 0, and equal values share the midpoint. The overall score is the weighted average.

Assume ten fictional dividend payers pass the same filters and have complete data. Company A is scored against the other nine. The figures are made up for illustration and do not describe any listed company.

Income score = 233.4 + 111.2 + 185.0 + 133.4 = 663.0, divided by the total weight of 9, gives 73.7 out of 100. The score describes A's position among these ten payers; it is not a forecast of its dividends or return.

1. Choose Income (dividends) in the scoring-model picker.
2. Add any filters, such as a minimum market cap or a sector.
3. Open a stock's breakdown to see its score on each of the four measures.

The model uses this fixed recipe; metric Score switches and custom weights do not change it, although filters still apply. It only scores companies that pay a dividend and have all four figures. Dividend growth needs three full years of dividends, and a payout ratio can't be measured when earnings are negative. At least ten eligible stocks are needed, and you can compare each stock within its own sector. See the full methodology.

• History is not a promise. A company can cut or suspend a dividend whatever its past record.
• One year of cash flow can mislead. Cover uses the latest fiscal year, and heavy investment or a one-off item can distort it.
• Banks can look poor on cover. Their cash flows swing widely even when the dividend is safe.
• Special dividends inflate trailing figures. A one-off payment lifts yield and growth for a while.
• It ignores business quality and valuation. A well-covered dividend can still come from a weak business.

Stock Meadow's scores are research tools based on reported financial data. They do not predict returns or recommend buying a particular stock. For a model that favours calmer stocks, read the Low volatility guide.

Each measure has its own page with a formula, how to read it and common pitfalls.

• Dividend Yield: yearly dividends as a share of the price.
• Dividend Growth Rate (3-Year): how fast the dividend per share has grown each year.
• Dividend Payout Ratio: share of profit paid out; 25–65% is sustainable.
• Dividend Cover by Free Cash Flow: how many times spare cash covers the dividend.

What is a good dividend yield?

There is no single answer. A higher yield pays more income per dollar, but an unusually high yield can mean the share price has fallen because the dividend is at risk. Read yield together with the payout ratio, free-cash-flow cover and dividend growth.

Is a high payout ratio bad?

A very high payout leaves little cushion if profits fall, and a very low one returns little to shareholders. Stock Meadow scores 100 for a payout of 25–65% and subtracts 1.5 points for every percentage point outside that range.

Why are companies that pay no dividend left out of the Income model?

The model is designed to score dividend payers on how generous, growing and well-covered their dividends are. A company with no dividend has nothing to measure, so it is listed as unranked with the reason.

What does dividend cover by free cash flow tell me?

It shows how many times the latest year's free cash flow pays the dividend. Below 1× means the dividend was not fully funded by free cash flow that year.