Four of the five companies on today’s list cut their dividend raises before the bad news hit their prices.

Sysco went from a 5.85% raise to 1.85%, and Zoetis went from 15.07% to 6%. Another on the list broke their run of 3-year 10% raises, while another’s cut was minimal.

Most of these happened before the news of them landed. We have to remember, the company boards see the cash flows before we do and make decisions accordingly. Dividend increases or cuts send signals to the market, which is why these decisions remain behind closed doors.

Today, we will run these five companies through my three valuation tools:

• P/FCF

• DCF

• Reverse DCF

We will also look at the dividend safety of each dividend, along with its growth, if any. Three of the five offer some teaching moments from their numbers and how to interpret them.

Okay, let’s dive in and grade this month’s batch.

1. Sysco (SYY)

Sysco is the largest foodservice distributor in North America, serving about 17% of a roughly $370 billion US market through 337 facilities. The company’s distribution and route density is hard to replicate, thus their moat.

Using our three tools with a current price (as of writing), $81.96:

• P/FCF (trailing): 20.6x versus a 5-year average of 24.9x (fair value zone)

• DCF base case (5% / 5% growth): $94.28, about 13% above the price

• DCF bear case: $63.59, roughly 24% below

• Reverse DCF: the price implies 2.6% annual growth after year three

Current free cash flow sits at $1.94B with a free cash flow margin of 2.3%. Retail margins are thin, are they not? At 5% growth, based on their historical performance, the company would hit free cash flow of $2.35B by 2031. The company’s own guidance calls for bigger growth beyond the 0.9% we are modeling after year three.

Bottom line, the company looks a little below fair value based on some conservative numbers.

Now the dividend.

The company is approaching its 57th year of dividend increases, with its current dividend of $2.29 representing 49% of free cash flow.

The dividend coverage and safety is in great shape.

The size of the raise is the problem.

• April 24, 2025: $0.51 to $0.54, a 5.88% increase

• April 17, 2026: $0.54 to $0.55, a 1.85% increase

That raise landed 18 days after Sysco announced a $29.1 billion acquisition of Jetro Restaurant Depot. The investor deck promised to “maintain current dividend amount and dividend aristocrat status.”

Notice the wording: amount, not how much. We can expect more minimal raises in the near future.

The other capital allocation lever, buybacks, fell from $1,250 million to $200 million and is suspended until further notice.

Here is the part that matters most for the valuation.

That DCF models Sysco alone through 2036. Jetro closes in the third quarter of fiscal 2027, in year one, bringing 91.5 million new shares (about 19% dilution) and $21 billion of debt, against roughly $1.9 billion of free cash flow.

Free cash flow per share still improves, from about $4.05 to near $4.89. Run those same numbers through the reverse DCF, though, and the implied growth rate flips from positive 2.6% to roughly negative 1%.

That’s the part that wreaks the valuation.

The verdict for your process: Sysco is a wide-moat distributor trading at a fair price, with a well-covered dividend. The hard part is that the acquisition puts any dividend raises and buybacks on the back shelf and pressures the valuation.

For me, this goes in the too-hard pile and will be revisited in the future.

2. Zoetis (ZTS)

Zoetis is the largest global animal health company. They sell vaccines and medications for pets and livestock, distributed through veterinarians. One of the more polarizing companies in the market right now.

Are they a value or a value trap is the question most want to know.

The company has experienced a 70% drawdown from its all-time high. And on screeners it looks mighty compelling and the cheapest “quality” business out there.

Our three valuation tools tell us:

• P/FCF(trailing): 13.3x versus a 5-year average of 44.3x (thus the attraction)

• DCF base case (5% / 3% growth): $96, around 27% above the current market price ($74)

• Reverse DCF: current price implies negative 2.3% annual growth after year three

Zoetis is trading at 30 percent of its own P/FCF multiple, and priced for continued decline. That screams like a gift.

If we dig deeper, we can see some problems.

For example, the reverse DCF implies near-term growth of 5.5% for the first three years. We base this on historical performance. During the most recent earnings call, the company itself guided to revenue growth of-3% to-1%.

Our model is compounding at 5.5%, while the company indicates it believes it will shrink. Now, revenue can flow into free cash flow growth, even if negative, with an extremely profitable, capital-light business, which Zoetis is. But that requires a stretch to reach those numbers.

Pulling on the multiple string, we also see some issues.

Using a five-year average is a fair benchmark for a business that remains the same business. Consider that Zoetis earned a 44.3x multiple during an eight-year monopoly with its drug, Cytopoint. During its run, it held 96% market share.

That moat has been breached with drugs such as Befrena by Elanco, and we can see the impact in the numbers.

• Global key dermatology revenue: $395 million, down 16%

• US in-clinic dermatology share: about 86%, down 10% year over year

• US companion animal revenue: $1 billion, down 11%

A multiple earned during a monopoly is not the multiple to compare it against. It’s not apples to apples.

Next up, dividend safety.

Here, the company performs better. For example, the company pays $2.12 annually with a yield of 2.8%. The free cash flow payout ratio sits at 39%, which is quite comfortable for now.

Zoetis announcing a cut from 15% annual growth to 6% told us something was coming.

The verdict: Zoetis has a well-covered, growing dividend that looks good on the surface. Remember, companies hate to cut a dividend. On the surface, the cheapness looks real, but the reason is real too. Buying Zoetis right now is a bet that management can right the ship and get it back on course to be the dominant animal vaccine and medication company. Even management doesn’t know. Kristin Peck, CEO, from the latest call: “It will take some time to work out. Is that six? Is that 12? Is that 18 months? I can't tell you.”

For me, interesting company, hard pass for now.

That’s the free part: the input check that has to come first, and two of the five graded in full.

Paid members, the rest is yours. Keep scrolling.

Here is what the screen could not tell you.

Zoetis and one of the three names below produce almost the same reading. Both in the attractive zone, both with a reverse DCF pricing free cash flow to shrink. Zoetis is shrinking. The other one raised its dividend 12% nine days ago and keeps 98% of its clients.

Telling those two apart took reading the filings. I did that for all five:

• The tool that flatters one of these stocks by $280 million. Fix the input and 33% of upside becomes 3%

• A bear case sitting 51% above the share price, and what a reverse DCF is actually telling you when it returns negative 11.4%

• The one-page scorecard, all five graded on valuation, coverage, and what the price assumes

Seven days free to read all of it.

Thirty-day money-back guarantee either way, so the only thing you are risking is the time.

Which one is cheaper?

Read more

Both thoughts can cost you money, because yield tells us about profits. It tells us nothing about the price or whether it makes sense.

In today’s article, we will cover:

• Why yield is not a good measure of value

• Price to Free Cash Flow as Tool One

• The Reverse DCF as Tool Two

• The Dividend Discount Model as Tool Three

First, a quick word: this whole lesson is free, and so is the newsletter. Subscribe, and you'll get a walkthrough like this every week, with real numbers pulled straight from the filings.

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Okay, let’s dive in and learn how to value dividend stocks.

Why Yield is Not a Good Measure of Value

Valuation answers one simple question. How much cash do we receive for every dollar we spend today, and how much will we get in the future? A bird in the hand is worth more than two in the bush.

Yield only answers the first year of that question, not the future. Two scenarios- a 6.9% yielding company that never grows the dividend and one that yields 1.5% but raises its dividend by 14% are two completely different questions.

We need tools that account for the:

• Price

• Cash behind the dividend

• Growth of dividend

Luckily, we have three tools we can use to cover almost all dividend payers. We can use price-to-free cash flow as a quick screener. The reverse DCF as a growth-story checker and the dividend discount model for stability.

Of course, we will always have exceptions. For example, for REITs, using P/FCF is a waste of time. Instead, I would substitute something like AFFO (adjusted funds from operations) for both the relative metric and the reverse DCF. And for MLPs, you’d want to substitute distributable earnings for free cash flow.

For each business model, you can alter or substitute its representative metric to help you find its fair value. The trick is knowing which metric and how to apply it.

Always treat these tools as methods to find the fair value, not as the end-all, be-all.

Lastly, I like to use all three as a form of sanity check to ensure I am not drinking the so-called Kool-Aid.

Tool #1: Price to Free Cash Flow

Free cash flow is the cash left over after a company pays its bills and reinvests in the business. Take cash from operations and subtract capital expenditures; simple. That leftover money funds the dividend, along with other reinvestments. As dividend investors, it is the number we should check first.

Price to free cash flow compares the company’s price tag to that leftover cash:

P/FCF = market cap ÷ free cash flow

Let’s look at Coca-Cola ($KO) as our guinea pig, because it teaches a good second lesson at the same time. The raw numbers from Coca-Cola’s 2025 10-K look scary at first blush:

• Operating cash flow: $7.4 billion

• Capital expenditures: $2.1 billion

• Free cash flow: $5.3 billion

If we do the math, Coca-Cola a $372 billion market cap is producing $5.3 billion in free cash flow. That translates to a 70x free cash flow ($372 / $5.3 = 71.5x). That seems off, and after digging into the cash flow statement, we can discover why.

This is the second lesson.

In 2025, Coke paid a one-time $6.1 milestone payment related to its fairlife acquisition. We can find this disclosure in the Q4 release.

If we add that back to the cash flow (it’s a one-time adjustment), then the normalized free cash flow equals $11.4 billion.

Lesson: always read the cash flow statement and calculate it yourself to double-check the math and ensure there aren’t any “funny” things in there.

Digging deeper, we can see that company management’s guidance provides even more clarity. In their Q2 2026 release, they announced cash flow guidance of $12.6 billion for the full year.

Now, let’s run the metric again:

• 2026 guided free cash flow: $12.6 billion

• Diluted shares: 4.31 billion

• Free cash flow per share: $2.88

• Price: $86.48 (as of this writing)

• P/FCF: 30x

At 30 times free cash flow, every dollar we buy equals about 3.3 cents of cash generated. Coke’s annual dividend of $2.12 consumes around 74% of free cash flow, a comfortable level for a stable business like Coke.

The multiple alone can’t tell us whether Coke is cheap or expensive, but it can help frame the question. If you adjust the multiple, we can see a range of values:

• 25x: about $72

• 28x: about $80.50

• 30x: $86.48

Another good practice is to look at the range over longer periods, for example, 5-10 years. And to compare it to others in its industry.

For example, Coke is trading at 30x free cash flow, with a high of 90x, a low of 18x, and a median of 28x. Pepsi is currently trading at 24.5x, and Dr Pepper is 26.4x.

What does this tell us?

That the company is trading roughly in the range of its “normal” value.

Remember, P/FCF, like any multiple, is a screen, and screens have limits. Multiples treat dividend growth the same as if the dollar of free cash flow were equal.

• For REITs: Substitute AFFO for free cash flow (P/AFFO)

• For MLPs: Use Distributable Cash Flow (DCF) for free cash flow (P/DCF)

• For BDCs: Use Net Investment Income for free cash flow (P/NII)

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Tool 2: Reverse DCF

Many investors are familiar with a discounted cash flow model, which takes free cash flow, projects it into the future, and then discounts it back to the present. The big problem with the DCF is you have to predict cash flows into the future. And I don’t know about you, but my crystal ball is quite cloudy, so future predictions remain tough.

And with every prediction, you have to ask: is this reasonable for the business?

The reverse DCF flips the script. You start with the one absolute known input, the price. And then we work backward from the price to determine what growth is the market baking into the price and at what discount rate.

Two terms we have to understand:

• Discount rate: the annual return you require to compensate for the risk of owning this business. We have several ways to determine an appropriate discount rate. One is to use a set rate regardless of the company, and most people use 10% as a sensible rate. The second is to calculate the cost of capital or WACC, which is a little complicated and involves a lot of assumptions, but is more precise company to company.

• Terminal rate: this is the growth rate we will assign the company beyond our projections, typically after 10 years. This is the forever growth rate assuming the company remains viable. Most investors use their economy's growth rate, and here in the US, we can use 2-4% to keep it simple. WARNING: It can never exceed the economy’s growth rate, NEVER.

We are going to use MSCI for our guinea pig for the reverse DCF. The process is the same regardless of the company. MSCI runs indexes which track trillions of dollars, collects subscription-like fees, and converts a ton of revenue into cash. It’s quite profitable to say the least.

Inputs for our reverse DCF based on Q2 2026 earnings:

• 2026 free cash flow guidance: $1,485 million to $1,545 million

• Free cash flow per share (72.9 million diluted shares): $20.78 (midpoint)

• Current price: $561.71

• P/FCF: 27x

Okay, now let’s look at a reverse DCF based on the above numbers. Let’s use a 10% discount rate, a 3% terminal growth rate with a 10-year horizon.

To get to our current price of $561, the market implies MSCI must growth free cash flow per share by 11% a year for the next decade.

The big question then. Does the 11% seem believable? If check the company history we can see a good base case:

• 2020 free cash flow per share: $9.56

• 2025 free cash flow per share: $21.06

• Five-year growth rate: 17.1%

History tells us MSCI has grown faster than the market implies or the price indicates. Both have had a helping hand from good revenue growth and a reduction in shares outstanding over the same period. The dividend has also grown, from $2.98 per share to $7.57 per share or 20.4%.

The gap between what the market believes and what history tells us is where we earn our money. If you believe index investing continues to compound and MSCI keeps buying back stock, then the price is asking less from you than MSCI has delivered. If you believe index investing has seen better days, then the 11% becomes a lot harder to achieve.

One warning: the reverse DCF is sensitive to changes in both the discount rate and terminal rate. For example, if we drop the discount rate to 9%, then the implied growth rate falls to 8.5%.

A good practice with a reverse DCF, run the model with two or three discount rates to get a range of possible outcomes. And then decide what’s reasonable based on your knowledge of the company.

As with P/FCF, substitute the same metrics above for free cash flow for a REIT, BDC, or MLP.

Tool 3: Discounted Cash Flow Model

The dividend discount model values companies based on the present value of all its future dividends, thus the name. The simplest version (which we use), the Gordon Growth Model, needs only three inputs.

Value = next year’s dividend ÷ (required return - dividend growth rate)

Works best for stable dividend growers with rates below the required return. For example, MSCI from above, would break in this model because 10% minus 13.9% gives us a negative number.

Steady growers work best like Coca-Cola, Proctor & Gamble, and Johnson & Johnson.

Today, we are going to use a REIT, VICI Properties ($VICI). For those unfamiliar, VICI owns real estate specializing in casinos on the Las Vegas Strip. Examples include Caesars Palace and the Venetian.

As mentioned earlier, we measure a REIT's cash flows as AFFO, or adjusted funds from operations. AFFO strips depreciation and other non-cash items from earnings.

Here are some inputs from VICI’s Q2 2026 earnings:

• Current dividend: $0.45 quarterly, $1,80 annualized

• Dividend record: 8 straight years of raises since 2018 IPO

• Dividend growth: 7.1% a year since 2019, with recent raises closer to 4%

• 2026 AFFO guidance: $2.45 to $2.47 a share, with a payout ratio near 73%

• Current price: $25.98, for a 6.93% yield

We will use 4% raises for the growth assumption. The earlier years represent a different interest rate environment, and the current raises are more conservative (always a bonus).

Now the math.

• Next year’s dividend: $1.80 x 1.04 = $1.87 (10% required return)

• Current value: $1.87 ÷ (0.10 - 0.04) = #31.20

• With an 11% required return and the same growth rate: $26.74

• With an 9% required return and the same growth rate: $37.40

How to interpret all this?

At $25.98, the DDM is telling us that VICI is priced to deliver 11% return if the 4% dividend growth rate holds. We determine the 11% return based on the 6.9% yield and 4% dividend growth.

Again, always use a range of numbers to help give you a sense of what’s possible and reasonable.

As mentioned earlier, the sensitivity warning applies doubly here. The denominator is a small number, so a one-point change in either assumption swings the value big.

How to Use These Tools in Your Process

Use these tools as a process to determine a fair value for every company you buy.

Use the P/FCF or substitute as a screener to find good investment ideas. Compare to historical performance over 5 to 10 years, and then compare to others in the same industry.

Next, run a reverse DCF to determine what growth rates the market is implying with the company’s current price. Judge these assumptions against the company history to determine reasonableness. Remember it is sensitive to the inputs of both the discount rate and terminal growth rate.

And finally, run the DDM to determine a fair value based on the growth of the dividend, which is what we are buying, not the cash flows.

Go a step further than most, write down your assumptions. Six months from now, check those assumptions and determine whether the thesis is still good or broken.

Common Mistakes to Avoid

A few traps to avoid:

• Trusting headline free cash flow numbers without verifying with the financials.

• Using a DDM on a fast growing dividend payer like MSCI, V, or MA

• Treating any ouput as a point estimate. Every number you calculate should measure against a range of numbers.

• Always, always check the free cash flow payout ratio or business relevant coverage.

Final Thoughts

None of these tools predict the future; wish they did. But treat them as a method to tell what a company might be worth. And our job is to decide whether or not those assumptions are reasonable.

Value the cash, check the dividend coverage, and understand the dividend growth you are paying for before we buy any company.

Until next time, take care and be safe out there,

Dave

P.S. For everyone already on the free list: the monthly Dividend School deep dive takes these same three models and runs them on one company from start to finish, every number pulled straight from the filings. This month it's Realty Income. Upgrading gets you that issue plus the full archive.

Today we will dive deep into whether the payment is safe and what a good price is to own Realty Income, among other things.

Here is what we will discuss:

1. One Taco Bell in 1969

2. The Bet

3. What the Company Does and Triple Net Lease 101

4. How Realty Income Makes Money

5. Moat and Competition

6. Financials, and the metric that sent a man to prison

7. Dividend Deep Dive

8. Growth Prospects

9. Management and Capital Allocation

10. Risks

11. Valuation

12. Decision

1. One Taco Bell in 1969

Bill and Joan Clark bought one Taco Bell in Northridge, California in 1969, straight from Glen Bell himself. Humble beginnings, as I mentioned.

The business model simple, and remains the same today.

They leased the Taco Bell back to the operator, collected monthly rent, and paid themselves every month. That single transaction is the whole business model, and the company still runs it today at a scale of 15,588 properties.

Realty Income remained private for its first twenty-five years. In 1994, they listed on the NYSE under the ticker “O.” A fairly confident decision to choose “O.”

That first monthly rent check became a monthly dividend check. Along with the 673 consecutive monthly dividends, the company has also raised the payout 135 times since the IPO. That performance has allowed them to join the list of Dividend Aristocrats with their more than 31 straight years of dividend increases.

Thirty-one years of raises can create a kind of lull or apathy about checking the dividend safety, which is why we want to dig deeper into that dividend and its safety. Remember, a long streak tells us the company has survived and prospered, but tells us nothing about what could happen now or into the future.

For example, this A3/A- credit rated company carries $31 billion of debt from a cheaper interest rate environment. they also have a retail tenant based with some troubled names in, along with a new bet on data centers with its execution risk and zero history behind it.

2. The Bet

We are betting on boring, and that boring Realty Income will continue to compound.

We are betting the company continues to collect rents from the thousands of its leases for decades. And continue to pass along at least three-fourths of its cash to us as a monthly dividend, which it has done for over 31+ years.

Currently, the company yields 5.3% based on the stock price of $62.56 (as of this writing). If we add dividend growth in the low single digits and AFFO growth around 4%, we get a potential return of 8-10% from a boring company.

This bet works if two things stay true.

1. The dividend continues to remain safe

2. Realty continues to find good places to invest with good returns.

Simple. Let’s dig into both questions and see if they will come true.

3. What the Company Does, and Triple Net Lease 101

Before we can dig into Realty Income, we need to spend a few minutes (10 or so) on how REITs work. If you already understand REITs and triple net leases, skip to section 4.

If you don’t, let’s dig in.

What is a REIT?

Simple, a REIT, or real estate investment trust, is a tax deal with the government. It works like this.

• The REIT pays no corporate taxes on its earnings

• In exchange, it must pay out at least 90% of its taxable income to shareholders as a dividend

Congress created REITs in 1960 so “normal” people could own commercial real estate without the burden and stress of buying land and buildings. Who knew they could get something done?

The practical impact for us, the normal people: REITs are legally required to be dividend machines. The dividend is the point of the REIT structure, which is why most REIT analysis focuses on the dividend, not the business.

Not all REITs are the same

The REIT covers a wide range of businesses, many of which don’t behave the same. And those differences matter.

Here are some examples:

• Apartment REITs re-lease every unit every year or two. Rents reset with the market fast, in both directions.

• Office REITs sign long leases and then spend heavily to keep tenants, because an office tenant expects the space rebuilt for them.

• Mall REITs own big boxes with rents tied to retail sales, and they carry high running costs.

• Industrial REITs own warehouses, usually on medium leases, with rents driven by shipping and logistics demand.

• Net lease REITs own single-tenant buildings on long leases where the tenant pays almost every cost of running the property.

Two things separate net leases from other REITs. The leases are long, typically 10+ years or more, meaning revenue is contractual instead of market-driven. And the landlord’s costs remain close to zero, meaning almost every dollar of rent hits the bottom line.

That combination enables the monthly dividend. A landlord whose revenue resets annually and whose costs move with inflation can’t offer or promise a dividend payment 673 months in a row. Realty Income, with a decade of signed contracts, can.

That’s their structural advantage.

The net lease, explained with a dollar store

Let’s illustrate the net lease using an example: Dollar General.

Picture Dollar General; the company has thousands of stores, with every store sitting in its own building. Dollar General could own those buildings, which was common back in the day, but not now. Consider that owning ties up capital that earns Dollar General nothing; the building sits there while the money tied up in ownership could be used to open new stores. And those stores earn 20% returns.

So Dollar General sells the building to Realty Income and signs a long lease to rent it back.

This transaction has a name: the sale-leaseback, and we should think of it as a financing deal wearing a real estate costume. The retailer (Dollar General) converts a dead asset into growth capital. The landlord (Realty Income) gets a decade-plus of contractual rent from a tenant that needs the building to run its business.

The lease that governs the deal is a triple net lease, and the three “nets” are the tenant’s obligations:

• Property taxes: tenant pays

• Insurance: tenant pays

• Maintenance: tenant pays

Compare this to the nightmare of owning an apartment building or an Airbnb. The landlord has to eat taxes, insurance, repairs, and the nightmare: the 2 a.m. plumbing call.

As opposed to that scenario, a triple net landlord’s operating costs are almost nothing.

Realty Income’s job comes down to two things:

• Buy good properties with reliable tenants

• Collect the rent

One last term to understand: the cap rate. The formula is the property’s annual rent divided by its purchase price. For example, Realty Income buys a building for $1 million that it rents out for $73,000 a year. That equals a 7.3% cap rate. Remember this idea; we will come back to it in section 4.

What you are underwriting

Here is the part that trips up new REIT investors.

When you buy a net lease landloard like Realty Income, the main bet is not only on the real estate. We are also betting on the tenats’ ability to continue paying rent for ten years or more on a contract they can’t walk away from. At least not very easily or cheaply.

Think for a moment what that lease represents.

A signed obligation from a company to pay a fixed amount every month for a decade or longer, with annual increases written in. Strip away the real estate and now it looks a lot like a corporate bond, with the exception that the collateral is a building the tenant needs to operate.

That framing changes what matters and what we need to understand.

The building’s value matters far less that whether Walmart remains solvent in 8,10, or 20 years.

Which is why Realty Income’s company disclosure reads like a credit analysis:

• How many tenants

• How many different industries

• Tenants with investment-grade ratings

There are two ways a net lease landlord loses money, and neither one is a property crash.

• The tenant stops paying, through bankruptcy or a store-closing program

• The lease expires, and nobody wants the building at the old rent

Everything Realty Income reports about occupancy, lease term, tenant count, and rent recapture is measuring those two risks. Keep those in mind, because the company tracks them and so should we.

From one restaurant to 15,588 buildings

Realty Income’s scale came in stages, and two giant mergers did the heavy lifting:

• 1969: one Taco Bell

• 1994: NYSE listing

• End of 2020: 6,592 properties

• November 2021: acquires VEREIT for roughly $11 billion in stock

• January 2024: acquires Spirit Realty Capital for $9.3 billion in stock

• Q2 2026: 15,588 properties

The portfolio more than doubled in six years with those two mergers. Here is what the one-time Taco Bell landlord owns now, from the Q2 2026 investor presentation:

• Retail: 78.3% of annualized base rent

• Industrial: 16.2%

• Gaming, data centers, and other: 5.5%

• United States: 79.5% of the book

• United Kingdom: 15.0%

• Continental Europe: 5.5%

Largest tenants include Dollar General, 7-Eleven, Walgreens, Wynn Resorts, and the British grocery chains Asda and Sainsbury’s, along with some Walmart’s sprinkled in for good measure. The portfolio spans 1,798 clients across 92 industries, with occupancy at 98.8% and a weighted average lease term of 8.6 years, per the Q2 2026 earnings release.

This is important. Notice what kind of retail. Convenience stores, dollar stores, drug stores, and grocery. The vast majority are places you drive to for things you need, now. Things Amazon has a hard time replacing.

Realty Income screens for tenants with a service aspect, necessity component, or a low price point. Which their tenant list covers perfectly.

We’ll discuss this more in the growth section. But Realty also runs a $1.7 billion private capital fund, a $1.5 billion build-to-suit program with Singapore’s GIC, and a $6 billion hyperscale data center venture in Virginia with Cloud Capital. And finally, a JV partnership with Digital Realty, one of the leading data center REITs.

4. How Realty Income Makes Money

The revenue model has three gears, and you can rank them by size.

Gear one: the rent escalator

Long leases come with built-in annual rent increases, typically around 1% for investment-grade tenants and higher for others. In Q2 2026, same-store rent growth ran 1.2%.

This gear helps build a monthly dividend. It is slow and contractual-based and grows slower than inflation.

Gear two: the spread

Realty Income raises in two ways, by issuing stocks and/or bonds. They then buy buildings which yield more than the cost of capital (equity or debt). That difference is the spread, and the spread is the bread and butter of Realty Income.

For example, let’s put some numbers to it. In Q2 2026 Realty invested $2.6 billion at a 7.3% initial cash yield. On the funding side (raising money), it issued 600 million euros of senior notes (debt) in July 2026 at a 3.625% coupon.

Let’s follow the money on a single billion dollars:

• Buy buildings at a 7.3% cap rate: $73 million of new annual rent

• Fund it with capital costing around 5% blended: $50 million of annual cost

• Spread: roughly $23 million a year, contractual, for a decade or more per lease

Run this math on the $10 billion of investment volume management guides to for 2026 and this spread becomes real money. This is why the balance sheet and the great credit rating matter so much. The math only works while capital remains cheap, and capital only remains cheap while the ratings agencies stay happy.

Gear three: releasing

When a lease expires, the company re-rents or sells the building. In Q2 2026 it recaptured 102.7% of expiring rent on releases. Old leases roll into new leases at higher rents. Meaning they are capturing higher rents on new leases on older buildings.

That’s pricing power.

The company also prunes. In the first half of 2026 it sold 177 properties for $348.6 million in net proceeds, recycling capital out of weaker buildings and into the acquisition pipeline.

2nd Quarter 2026 Results

Here are the numbers from the August 5 earnings release:

• Revenue: $1.55 billion, up from $1.41 billion a year ago

• Net income per share: $0.37

• AFFO per share: $1.09, up 3.8% year over year

• Occupancy: 98.8%

• Investment volume: $2.6 billion at a 7.3% initial cash yield

• 2026 AFFO guidance: raised to $4.44 to $4.45 per share

Notice the gap between $0.37 of net income and $1.09 of AFFO.

That gap is the single most important thing to understand and what separates it from a “normal” company like Walmart. And why analyzing REITs is different, and this is where the paid section starts.

Already a paid subscriber? Skip ahead; the full breakdown starts below.

The rest of this deep dive is for paid subscribers of Dividend School.

Below the line:

• The accounting metric that makes a 200% payout ratio look conservative, and the CFO who went to federal prison for inflating it by five percent at a company Realty Income later bought

• The dividend safety math, including what happened to rent collection in 2020 when governments closed the tenants, and the three numbers that tell you when a thirty-year streak is in trouble

• My valuation across three lenses, the buy-below price, and the one change that would make me sell

How cheap is it?

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Show me the last three

If you were screening for high-yield companies and saw a 10% yield, it used to mean the company was broken.

In 2026, you can build a basket of ten dividend payers averaging around 7.7%, with most of them raising their payouts this year. The Fed’s cutting cycle is helping some and squezing others. Which makes right now a good time to sort the durable yields from the traps.

In today’s post, we will discuss:

• A two-minute safety check for any high yield, using one coverage number per asset type

• My top 10 high yield picks for 2026, ranked from 10 to 1

• The one metric each pick teaches you, so by the end you can run this screen yourself

• The catch in every name, because there is no free lunch on Wall Street.

Okay, let’s dive in and count them down.

Two Minute High Yield Safety Check

High yield investments come in different flavors, and each flavor has its own coverage math. We can’t judge one company against another without accounting for the business model. You can’t look at pizza and judge it next to hard-boiled eggs. First yuck, and then not a fair comparison.

Here is the cheat sheet we will use across the board on our list:

• Common stocks: free cash flow payout ratio (dividends paid ÷ free cash flow). I want under 70%.

• REITs: AFFO payout ratio (dividends ÷ adjusted funds from operations). Under 80% is healthy.

• Midstream MLPs: distributable cash flow coverage (DCF ÷ distributions). Above 1.4x is comfortable.

• BDCs: net investment income per share versus the dividend. NII needs to cover the payout.

• Covered call ETFs: there is no coverage ratio. The payout comes from option premiums, so you judge total return.

One more rule before we start. When a yield looks unusually high, check whether the yield is high because the payout grew or because the price collapsed. The second kind is the one we want to avoid without more work done.

Now, the list.

#10: NEOS S&P 500 High Income ETF (SPYI), ~12.0% distribution

The highest payout on this list lands in last place, and for a good reason.

SPYI holds the S&P 500 and sells index call options against it, then pays the premium out as a monthly distribution. That payout is funded by options income, and a large share of it has been classified as return of capital. A dividend from Coca-Cola comes out of profits. This comes out of a strategy, and the strategy caps your upside in strong markets.

Here is the 2026 scorecard so far:

• Distribution rate: 12.04%

• 2026 total return through early August: +10.7%

• S&P 500 total return over the same stretch: +14.0%

• Expense ratio: 0.68%

Full credit were due, SPYI buys back call spreads to retain some upside, which is why it earned about 3/4 of the market’s gain while competitor JEPI earned less than half. The SPX options all get a 60/40 tax treatment, making this one of the more tax-friendly funds, and an overlooked benefit.

The lesson: the distribution and the dividend get funded from different engines. And the engine drives both the tax treatment and how the payout behaves during a downturn.

The catch: The tax bill comes due someday, and your return of capital lowers your cost basis, so today’s income impacts the future tax bill.

#9: Altria (MO), 6.35% yield

Altria has been on the struggle bus for years as smoking has lost its allure, at least here in the US. Despite the business slowing, the company continues to pay a growing dividend with a high yield.

57 straight years of dividend increases, and the company raised it again in June 2026, to $1.06 per quarter. The free cash flow payout ratio math still meets standards despite the revenue slowing to -0.9% over the past three years.

• 2026 adjusted EPS guidance: $5.61 to $5.72 (raised at Q2)

• Annual dividend: $4.24

• Annual free cash flow per share: $5.46

• FCF payout ratio: roughly 78%, right at management’s 80% target

What keeps driving the business is pricing power. Altria raises prices faster than volumes decline. Cigarette shipments fell 3.2% last quarter, yet adjusted EPS grew 2.8%. And the on! nicotine pouch business is also taking share, now 8.6% of the category.

The lesson: The free cash flow payout only means something when the company continues to generate profits. And Altria’s holds right now because their pricing power outruns the decline in volumes. This works until it doesn’t, which is why it is #9 on the list.

The catch: we are betting on the decline remaining slow and steady. Watch shipment trends every quarter.

#8: Realty Income (O), 5.25% yield

Realty Income (which we own, full disclosure) has paid 673 consecutive monthly dividends and raised its payout for 31 years since its IPO in 1994.

New investors look at REIT payout ratios against earnings and ask, what? Keep in mind, depreciation crushes REIT paper earnings while their buildings continue to collect rent. This is why we AFFO (Adjusted Funds from Operations) a proxy for free cash flow for REITs. This adds back the depreciation.

Run the check on 2026 numbers:

• 2026 AFFO guidance: $4.44 to $4.45 per share (raised at Q2)

• Annual dividend: $3.25

• AFFO payout ratio: roughly 73%

• Occupancy: 98.8%

Realty Income carries an A3/A- credit rating, among the best in the REIT sector, indicating a strong balance sheet. And growth-wise, the company committed $1.4 billion to a data center joint venture to expand beyond its retail net lease business model.

The lesson: judge a REIT on AFFO, never on EPS. A REIT payout ratio of 73% on AFFO is comfortable. The same dividend measured against accounting earnings would look terrible, and that gap keeps people out of good REITs.

The catch: at a $58 billion market cap, moving the growth needle will take continued large deal volume. This is a stability holding, and I treat the data center pivot as something to watch, since it adds execution risk outside the core business.

#7: MPLX (MPLX), 7.3% yield

MPLX is the fastest raiser on this list, and the cost of that speed is the lesson.

This midstream partnership, formed by Marathon Petroleum, raised its distribution 12.5% last year and is guiding to 12.5% increases in both 2026 and 2027. Stack that on a 7.3% starting yield, and the income math gets loud fast.

The tradeoff shows up in the coverage line:

• Q2 2026 distributable cash flow: $1.45 billion

• DCF coverage: 1.3x, the thinnest of the midstream names here

• Leverage: 3.7x debt to EBITDA

• 2026 growth capex: raised to $2.9 billion

Coverage of 1.3x is still fine. It is the direction that needs watching, because aggressive raises plus rising capex is how comfortable coverage becomes tight coverage in a couple of years.

The lesson: distribution growth is not free. Every point of growth comes out of the coverage cushion, so watch the pair together, never one alone.

The catch: Marathon Petroleum is both the parent and the dominant customer, so you carry concentration risk. MPLX also issues a K-1 tax form, which I would keep out of an IRA. That goes for every partnership on this list.

#6: Hercules Capital (HTGC), ~10.9% yield

Hercules lends to venture-backed technology and life science companies, which sounds terrifying until you look at its underwriting.

BDCs live and die on credit quality, and the tell is the non-accrual rate, the slice of loans no longer paying. Here is the Q2 2026 picture:

• Non-accruals: 0.3% of portfolio cost, best of the big BDCs

• Net investment income: $0.50 per share, a record

• Base dividend: $0.40, covered 1.25x by NII

• NAV per share: $12.15, up 2.1% in the quarter

The payout structure matters here. Hercules pays a $0.40 base dividend plus a $0.07 supplemental. If falling rates squeeze income, the supplemental flexes first and the base stays protected. There is also $0.92 per share of spillover income banked as a cushion.

The lesson: with any BDC, read the non-accrual line before the yield, and learn which part of the payout is flexible.

The catch: the market knows this is a quality lender, so the stock trades at 1.42x NAV. You are paying a 42% premium to book value, and premiums compress in bad markets even when the underlying book performs.

#5: Verizon (VZ), 6.1% yield

Verizon has the most boring dividend on this list, and boring is doing a lot of work in its favor.

The free cash flow payout ratio is the cleanest safety test for a common stock, so let’s run it on the first half of 2026:

• Free cash flow: $10.2 billion

• Dividends paid: roughly $5.9 billion

• FCF payout ratio: about 58%

A 6% yield covered under 60% by free cash flow is rare. The business behind it just posted a record 40.1% EBITDA margin, and management raised full-year guidance on both earnings and free cash flow at Q2. The dividend has grown for 21 straight years, and grown slowly, about 2% a year.

The lesson: yield plus coverage beats yield plus promises. A 6% yield growing 2% annually, covered nearly twice over, compounds more reliably than an 8% yield covered at 100%.

The catch: revenue missed estimates last quarter, and wireless competition stays brutal, so the growth story is modest. The debt load is the other reason the raises stay small. You own this for the check, and the check is well protected.

#4: Enterprise Products Partners (EPD), 5.9% yield

Enterprise is the lowest yield of the midstream group and the one I would trust furthest into a recession.

Every durability box gets checked at once here:

• DCF coverage: 1.9x on record Q2 distributable cash flow of $2.3 billion

• Leverage: 3.0x, dead on target

• Credit rating: A-, the only midstream operator rated single A across all three agencies

• Distribution streak: 28 consecutive years of increases

That 1.9x coverage means Enterprise retained over $1 billion last quarter after paying everyone, cash that funds growth without borrowing. Volumes hit records across the pipeline network, and earnings per unit grew 27% year over year.

The lesson: coverage and the balance sheet are the same story told twice. A partnership that retains half its cash flow never has to choose between the distribution and the debt payment. When you find 1.9x coverage next to an A- rating, the yield in front of it is about as safe as midstream gets.

The catch: safety is priced in. You accept a sub 6% yield and roughly 3% annual growth, and the export-heavy business carries some China demand risk.

That’s the free part: the two minute safety check for every wrapper that pays a yield, plus picks 10 through 4, seven names averaging about 7.7% with the coverage math shown for each one.

The top three are where the yield and the safety stop trading against each other. One of them cut its payout in half in 2020, and the market is still charging 2020 prices for a distribution that is now covered more than twice over.

Below the paywall, members get:

• The casino landlord whose tenants paid every rent check through the COVID shutdowns, and the lease math that can make two tenants safer than forty.

• The BDC blue chip yielding 9.6%: 18 years without a cut, non-accruals near historic lows, and a price sitting at roughly the value of its loan book.

• My #1 high yield pick for 2026. The best coverage cushion of any 6%+ name on this list, and the reason it’s still cheap is a cut the current cash flow statement contradicts.

• The full scorecard: all ten names, yields, and coverage checks in one table, so you can rerun the safety check yourself when next quarter’s numbers land.

• The one number I would recheck every quarter on each of the top three, and the level where each one would fall off this list.

Start with a 7-day free trial and read all ten names before paying a dollar. Membership is $369 a year or $35 a month, with a 30-day money-back guarantee either way.

Show me the last 3

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Today’s issue is a first for us. I’m sharing it with someone else.

I want to introduce you to Max, the founder of MaxDividends. The dividend corner of Substack is small, and Max is one of the best (arguably the best) in our little corner. He has built one of the best dividend investing communities out there by publishing real research every week for years. He is what I want to be when I grow up.

One of the many things I admire about Max is that he runs an actual system. The MaxDividends Income System scores every company on business quality and dividend safety before he will even consider owning it, and he shows you the scores. Complete transparency, which is refreshing in the investing world.

He also focuses on helping people grow dividends to pay the bills, which is what we are trying to do too.

Check out his newsletter:

👉 MaxDividends

A few weeks back, Max and I got on a call that was supposed to run 30 minutes and went a lot longer. Somewhere in there, he floated an idea.

Max: Dave, what do you think about writing a research report together? Let’s pick one company that meets both your framework and the MaxDividends framework.

Dave: I love that idea. Let’s do it.

Well, here we go…..

Today’s report is the result of that collaboration—a complete research report on a company that successfully passed two independent quality frameworks and earned its place on both of our watchlists.

Consider this our complimentary joint Dividend Research Report. Enjoy!

The headline wasn’t lying. We deliberately picked a company that’s a little outside today’s market hype. But that’s often where the most interesting long-term opportunities are found.

Our shortlist started with 15 companies. Then we narrowed it down to 6. Then 3. And in the end, we both landed on the same business. Well... partly because we both happen to love pizza.

I will kick things off by walking through my framework and explaining why Domino’s earned a place on my list.

Then Max will walk you through the company using the MaxDividends framework and show you how he reached the same conclusion from a different angle.

Here I go.

Dave Analysis

Most think Domino’s ($DPZ) sells pizza, and they are not wrong. But the business model revolves around franchises and the pizza (while great) drives growth.

The company sells around $20 billion in pizza, but records revenues of $5 billion+.

That gap is the whole business, so let’s start there.

🟢 Business quality

Domino’s does not sell pizza. It franchises pizza, and it supplies pizza.

The franchise model works like this: the company owns 186 stores, with franchises of 22,531. The franchisees put their own money up to build the stores and collect all the money from sales. They pay Domino’s a 5.5% royalty, while the franchisees buy their dough, cheese, and boxes through the 22 US supply chain centers.

Here’s where FY2025 profit came from:

• US stores: $1,611.8M revenue, $575.3M segment income (48.6% of profit)

• Supply chain: $2,989.5M revenue, $320.1M segment income (27.0% of profit)

• International franchise: $338.7M revenue, $288.5M segment income (24.4% of profit)

The international line is the standout. It throws off 6.9% of revenue and a quarter of the profit at an 85% margin, because a royalty check costs almost nothing to collect.

And this detail from the 10-k is interesting. Domino’s hands its franchisees 50% of the pre-tax profit from the supply chain centers. Franchisees are not obligated to buy from Domino’s, but the vast majority do because they own half the upside.

That is a supplier relationship almost nobody else in franchising has and is part of the genius of the model.

FY2025 free cash flow was $671.5M, up 31% from $512.0M.

One warning before you screen this company. Return on Equity will look like crap because of 20 years of borrowing to buy back stock. The ROE screeners will show negative $3.98B in shareholders’ equity.

Do the calculations by hand; with around $745M of after-tax operating profit on about $590 of net operating capital, we see a better ROE. All because the stores are funded by someone else.

🏰 The moat

The moat protecting the business revolves around three things. And one of gets stronger every year.

1. The advertising fund. US franchisees pay 6% of sales for a national ad fund, collecting $559.5M in 2025, up 9.7%. By comparison, Pizza Hut’s is under $5B and shrank 8.2% last year, and Papa John’s is around $3.7B and falling. Those companies' ad funds are a cut of the system sales, so the marketing budgets shrink while Domino's grows.

2. The supply chain. Margins grew from 9.04% in 2023 to 10.71% in 2025. That expansion is what pays for the $9.99 promotions without crushing franchisee profit.

3. The loyalty program. 37.3 million active members. The 2023 relaunch dropped the earning threshold to $5 to grab carryout customers, and carryout comps ran +6.5% in Q4 2025 against delivery at +1.6%.

Moats don't go from strength to strength; we have to look for chinks too.

The US QSR pizza category shrank about 0.3% in 2025 while Domino’s US retail sales grew 4.8%. So the outperformance is share taken from Pizza Hut and Papa John’s. The downside to this, share taken from shrinking competitors, is a finite resource.

Domino’s also spent twenty years teaching pizza delivery meant its own app and its own drivers, then joined Uber Eats and DoorDash. The store economics survive that, because Domino’s charges more on the apps and still drives every order itself. What does not survive is owning the screen where the customer decides.

The first half of 2026 showed the strain:

• Q1 2026 US same-store sales: +0.9%

• Q2 2026 US same-store sales: +0.1%

• Q2 2026 delivery comps: −0.7%

CEO Russell Weiner blamed a premium pizza launch whose “messaging wasn’t compelling enough.” Joe Jordan takes over as CEO on October 1.

I score the moat as wide and durable. I also think the growth runway is shorter than the “Hungry for MORE” plan advertises.

🛡️ Dividend safety

Dividend Safety Score: 3.9 / 5 (Healthy)

• Free cash flow payout: 35%

• Earnings payout: 39%

• Interest coverage: 4.9x

• Return on invested capital: 51%

• Dividend growth streak: 12 years

• Five-year dividend CAGR: +17.4%

The payout is the easy part. Domino’s paid $236.9M in dividends out of $671.5M of free cash flow in FY2025 and still had room for $357.7M of buybacks on top.

The debt is what holds this at 3.9 and keeps it from scoring higher. Domino’s carries $4.88 billion of notes against $165M of cash, at 4.3x leverage.

None of that threatens the dividend. A 35% free cash flow payout covers it easily. But pay attention to the debt and interest coverage, for any sign of trouble.

💲 Valuation

At $347.44, Domino’s trades near its cheapest valuation of the past ten years.

• P/E: 19.7x (five-year average 26.5x)

• Price to free cash flow: 17.6x (five-year average 26.7x)

• Free cash flow yield: 5.69% (five-year average 3.91%)

Since 2021, Dominos has grown earnings 29%, while the share price dropped 35%, indicating multiple compression with no business decline.

Using a reverse DCF, and following inputs:

• TTM free cash flow of $653.4M

• Discount rate of 9%

• Terminal growth rate of 3%

The current market cap of $11.5B implies 3.3% annual free cash flow growth for the next decade.

The market is pricing Domino’s for around inflation. When you consider Domino's has compounded free cash flow at 8% a year since 2019, and the company’s guidance calls for 8% operating income growth, it looks like a mispricing to me.

One honest caveat. My 9% discount rate is a choice (roughly around the WACC or the company’s cost of capital), and at 8% the implied growth drops to 1.0% while at 10% it rises to 5.4%.

✅ My verdict

Buy, with the 2027 refinancing on the watch list.

Plus side:

• 99% franchised stores

• 85% international margins on royalties

• Supply chain that shares profits with franchisees

• 11 years of share gains

• FCF growth of 11% in 2025.

What changed is the price, and the reverse DCF says the market now wants 3.3% growth out of a business delivering double that.

Two things I’m watching:

• US comps recover above 2%

• Whether Joe Jordan resets the 2028 targets when he takes over.

I own this great company and will continue to add on weakness.

Max Analysis

How I Analyze Dividend Stocks

For today’s analysis, I’m using the MaxDividends Income System inside the MaxDividends Research Platform - the same framework I use every week to evaluate every company before adding it to my portfolio.

🟢 Business Quality

Every company first has to prove it’s a great business before I even look at the dividend. The Business Quality Score is built around five core areas:

• 📈 Consistent sales growth

• 💰 Growing profits

• 🏦 Strong net income

• 💵 Healthy dividend coverage

• ⚖️ Conservative debt levels

✅ DPZ Business Quality Score: 97/99 — Very Safe

Domino’s scores 97 out of 99, placing it firmly in the Very Safe category.

🛡️ Dividend Safety

A great business doesn’t automatically make a great dividend stock. Our Dividend Safety Score combines four key factors:

• Business Quality

• Dividend policy and consistency

• Payout sustainability

• Long-term dividend growth

✅ DPZ Dividend Safety Score: 97/99 — Very Safe

Domino’s scores 97/99, giving me confidence that today’s dividend remains well supported by the business.

💲 Valuation

That conclusion comes from two independent checks:

• Value vs. Peers — compares Domino’s profitability with other companies in the industry.

• Value vs. History — compares today’s valuation with the company’s own long-term average.

Together, they suggest the stock is trading around a reasonable valuation rather than at an extreme premium or discount.

✅ DPZ - Fairly Valued.

Today, the MaxDividends Research Platform rates Domino’s as Fairly Valued.

Two More Things I Personally Look For

Beyond the platform scores, there are two filters I rarely compromise on.

1. A long history of dividend growth

Domino’s has paid dividends for 13 years and has increased its dividend every single year since initiating it. That’s exactly the type of consistency I want in a long-term income portfolio.

2. MaxRatio 10+

MaxRatio is a proprietary MaxDividends metric designed to identify companies with strong long-term dividend income potential.

It combines:

• current dividend yield;

• dividend growth over the past 3, 5, and 10 years;

• Business Quality Score;

• Dividend Safety Score.

Higher MaxRatio companies have historically shown the strongest combination of dividend growth and business quality.

Domino’s comfortably meets that requirement.

Final Verdict

🟢 Max’s Consensus: PLAYING

Every company in the MaxDividends Research Platform falls into one of three categories:

• 🟢 Playing — high-quality businesses worth actively considering.

• 🟡 Watching — strong companies, but waiting for a better opportunity.

• 🔴 Skip — companies that don’t currently meet our quality standards.

Domino’s Pizza earns a clear Playing rating.

Bottom Line

We hope you found this idea as interesting as we did.

But no matter which framework you use—or what decision you ultimately make—always put your own goals first. Take your time, do the work, and invest with care.

Our shared goal is simple: build a growing stream of dividend income that can become a dependable source of financial independence, help cover everyday expenses, and eventually give you the freedom to live on your own terms.

Whether you’re just getting started or already well on your way, Dave and I sincerely hope you keep moving forward.

May the dividends pay the bills!

— Dave & Max
Founders, Dividend School | MaxDividends

Dividend School

Subscribe free and get Dividends Decoded in your welcome email. Learn to analyze dividend stocks with Buffett's framework. No stock tips, no jargon, just a repeatable method. 16 years investing, 13 teaching.

By Dave Ahern

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The Income Machine Report: Issue #2 · August 8, 2026

All thirty of our Dividend Universe companies have now reported.

Microsoft had a good day, recording almost half a trillion in market cap in one day. The largest single-day gain any company has ever posted. Enterprise raised its distribution and covered it by 1.9 times. American Tower raised its payout 5.3% and raised guidance for the second time this year.

Good news: zero dividend cuts this quarter.

The income machine keeps growing and paying.

Last week, five names took over the Best Buys Now, and four of the previous five moved down the list. Almost all Buy Below numbers were recalculated based on second-quarter earnings or cash flows.

Today, we issue the full report card on the Universe.

The Biggest Surprise: Microsoft

Wednesday, July 29th, Microsoft reported its fiscal fourth quarter. Wall Street loved the results and the stock rose around 15 percent, the largest one-day market value gain on record.

Here is what the market saw:

• Revenue: $90.0B, up 18%

• Azure: up 43%, now past $100B in annualized revenue

• Adjusted EPS: $4.74, well ahead of estimates

• Copilot: more than 30 million paid seats

And here is what our five questions saw.

Free cash flow of $19.6B for the quarter, down 23 percent year over year. Quarterly capex with leases up 69 percent, or $41B. Management stated the first quarter of 2027 will run around $50B, with the full year capex estimates growing again.

This is the question of the day for Microsoft and any hyperscaler. AI spend in capex is growing by leaps and bounds, and it’s starting to impact the free cash flows.

And for Microsoft, it was no different; the capex is crowding out the cash. Sequentially, it has grown over the past three quarters, but year over year, it is down and flat over the past two years.

One more wrinkle in respect to capex spend. Headlines after the earnings stated Microsoft would decrease total 2026 spend from $190B to $175B. But the fine print told another story: the company was stretching data center depreciation from 15 years to 25. The actual buildout didn’t change.

Now the dividend payment.

Last quarter, Microsoft paid its shareholders $6.8B in dividends, compared to $19.6B in free cash flow in the heaviest capex quarter to date. That is nearly three times covered at the low-water mark. The dividend is not in question. The question revolves around growth and the size of the next raise. That will tell us what Microsoft management thinks of the cash flow trend and how they will continue to fund this capex expansion.

Verdict:

• Dividend payment safe

• Dividend covered

• Capex equals a yellow light to continue tracking.

At $464.72 against a $332 Buy Below, the market has already paid itself for the good news. We hold, we collect, and we watch the raise.

That analysis, applied to every report since Issue #1, is below.

The headlines said Microsoft cut its 2026 spend from $190 billion to $175 billion. The filing said it stretched data center depreciation from 15 years to 25 and built exactly as much as it always planned to.

That is the difference between reading the press release and reading the report. I did this for all thirty.

Show me the other 29

In this issue

• The re-tier: five names took over the Best Buy Now list, four got demoted, and nearly every trigger moved

• Eleven report cards from the heaviest week of the season, including a beat-and-raise the market sold and an EPS “miss” that was never real

• Safety scores: the verdict on all 30 going into the back half of the year

• The Buy Below watch: 17 names in the zone, the most all season, including one giant that entered without the price moving a dollar

• The four reports landing this week, graded as they came online

• Three dates for your calendar

That’s the season’s biggest surprise, graded in full, free: the record day, the cash flow math underneath it, and the verdict on the payment.

That’s also one report card of thirty. The other twenty-nine are face-down below, next to the new Best Buy Now five and every recalculated trigger.

Start a 7-day free trial and turn them all over. Membership is $369 a year or $35 a month after that, with a 30-day money-back guarantee either way.

Unlock the other 29 report cards

Want to see the depth first? Here’s a full specimen deep dive, free: Johnson & Johnson: A Dividend Machine

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Show me all 50 scores

The highest yield in the S&P 500 right now is 7.03%.

The company is Pfizer (PFE), the pandemic darling, which scores a 1.5 out of 5 in dividend safety. Only three companies were worse on this month’s list.

The market is offering you 7% to hold a dividend it has no faith in, and my dividend safety scoring model agrees with the market.

The 60-second lesson

Yield is a price signal.

The formula tells us why. We calculate yield by dividing the annual dividend by the current share price. So a yield can get big two ways: the dividend grows fast, or the price falls hard and fast. With a mature company like Pfizer, it’s almost always the price. Sometimes it can be a surprise, but most times it’s not.

The market drove Pfizer’s price down for a reason.

When a company yields three times the index average, currently 1.3x, the market is telling us it expects something to happen to the dividend. Either for it to shrink or disappear. Other times it is telling us something is going wrong with the company. Since the market is forward-looking, it can anticipate downturns in revenue, margin contraction, or general business decay.

Now, sometimes the market is wrong, and those exceptions can be fantastic investments, I am looking at you Accenture (ACN), hopefully.

The scorecard is how we tell the exceptions from the bait.

If you want to check out the socrecard, input by input, I walked through it here in this free post.

Dividend Safety Scorecard.

If you want to trace any grade below back to its inputs, start there.

How the tracker works

Every issue of the tracker going forward follows the same four rules, so let’s set them up.

• The universe: the S&P 500, sorted to identify the top 50 dividend yields.

• The grade: every name gets my dividend safety score, 0 to 5, from the same model I use in the deep dives.

• The bands: below 2.0 is trap territory and gets flagged. 2.0 to 3.0 is study-only. 3.5 and up is the safe tier.

• The schedule: a fresh list every month, scored fresh, with the prior month’s list graded in public.

Free readers always get the top 10 with scores. Members get all 50, with every trap flagged.

One more rule, and it helps give us a start on the analysis work. The list is a screen, only. A high score earns a name on our research pile, with us to do the work identifying the other elements of the business quality, i.e., moat, financial strength, dividend strength, and valuation.

The top 10, scored

Here are the ten biggest yields in the index as of August 4, 2026, each with its safety score and my one-line analysis on the dividend safety (good or bad).

The average score across the ten is 2.82, compared to 3.30 for the forty names behind the wall, which highlights the first lesson. On this list, the bigger the yield, the worse the grade. Remember our chat covering yield from above.

Sometimes the yield is high for a reason, and often it’s not a good one. Buyer beware is the ultimate lesson here.

Test Case: Pfizer (PFE)

Pfizer currently pays the highest yield in the S&P 500 at 7.03%, priced at $25.13, and our Dividend Safety Score of 1.5 out of 5.

What’s driving the low Safety Score?

Simple: payout ratios. Both payout ratios (earnings and free cash flow) from the second quarter 2026 performance:

• EPS payout ratio: 126%

• FCF payout ratio: 108%

Both numbers tell us the same thing. For every dollar Pfizer earns, it pays $1.26 in dividends, and for every dollar of free cash flow produced, it paid $1.08.

Companies can cover those gaps for a time with cash on hand, asset sales, borrowing, or equity sales. And that works until it doesn’t. What they can’t do is grow a dividend the business cannot fund.

Those two payout ratios drag Pfizer’s grade down to 1.5. When both ratios sit above 100%, the dividend costs the company more than it earns and the cash it produces, and that combination puts the grade in trap territory. Something has to give, the company generates more growth in revenue and profits, or the dividend gets cut, frozen, or stops growing.

For the dividend safety to improve, both payout ratios have to get under 100%. Pfizer can do this in three ways:

• Earnings recover

• Free cash flow growth

• Dividend shrinks

The first two are the bull case; the third is the market pricing in the 7% yield.

A 1.5 Dividend Safety score of 1.5 is a verdict. Pfizer fails this test, and the market is telling us with a high yield.

That's one name taken apart. I ran those same two payout ratios across all 50 and graded every one. Six came back below 2.0. If you'd rather read the finished board than work through it a name at a time, that's the membership.

Show me the other 40

Two traps on this list already sprang

Here’s a couple more traps to showcase the yield trap idea.

Two companies on this month’s list cut their dividends in the last 12 months:

• Alexandria Real Estate (ARE): cut the quarterly payout 45% in December 2025, from $1.32 to $0.72 per share. The company made the cut to shore up liquidity and preserve roughly $410 million in annual cash flow while life science real estate stays soft.

• The second name sits behind the paywall. It cut 32% in mid-2025 and still scores just 1.6 today.

The tracker exists to inform before announcements like those two.

That’s the top 10, scored, plus the full workup on the scariest one.

Behind the wall, members get the other 40, and a few of them deserve a warning label:

• The safest name on the list: a 3.7% payer with a perfect 5.0, and almost nobody talks about it.

• The worst score on the entire list is a 1.1, and it belongs to a regulated utility yielding 4.9%, sitting quietly at number 16.

• 6 of the 50 score below 2.0. I flag every one, and only two of them are in the top ten you just read.

• A brand sitting in your medicine cabinet right now yields 4.4% and lands in study-only territory.

• And the mid-2025 cutter that still scores 1.6, because a cut resets the payout without always fixing the business.

Start with a 7-day free trial and read the full list before paying a dollar. Membership is $369 a year or $35 a month, with a 30-day money-back guarantee either way.

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In the next 30 minutes, you will learn how to check the math yourself.

In today’s post, we will learn:

• What a 10-K is and where to find it for free

• The 30-minute tour through the filing, step by step

• The numbers that tell you whether the dividend is safe and where to find them

• A checklist you can save and reuse on any dividend payer

Okay, let’s dive in and read a 10-K together.

What a 10-K is and where to find it

A 10-K is the annual report every US public company files with the SEC. In it you will find the audited financial statements (income statement, balance sheet and cash flow statement), business description, risks, and any legal problems they would rather not discuss.

Pro tip: These are documents prepared by lawyers, polished by management and HR teams. They must disclose all pertinent financial information so any investor can make an informed decision. It does not mean they disclose everything willingly.

There are many ways to pull a 10-K, several of them free.

The first free one, and the most reliable, is sec.gov. Go to the EDGAR full-text search, type the company name or ticker, and filter for the “10-K.” No subscription is needed. Here you will find every U.S. publicly traded company and all of their financial reports from the 10-K and others such as:

• 10-Q (quarterly report)

• 8-K (news and updates)

• Proxy filing (management voting and incentives)

• 13f (equity disclosures - what they have invested in)

Another free resource is the company website. Go to any company and look for the Investor Relations link. Here you will find tons of investor-related information, including links to the above filings. You will also find investor presentations, meeting notes, and other interesting information. A true treasure trove which most investors ignore.

Lastly, you can find the same information at your brokerage account, financial websites such as Fiscal.ai or Seeking Alpha. Many of these are paid, so keep that in mind.

Let’s use Johnson & Johnson as our guinea pig. J&J filed its most recent 10-K on February 11, 2026, covering the fiscal year that ended December 28, 2025. Every number we use below comes from that filing.

One note before the clock starts on our 30 minutes.

A 10-K can run a hundred pages, give or take; Netflix runs around 65, and JP Morgan over 200. Today you are not going to read all of them. The skill we will cover today is knowing which 20 pages matter for a dividend investor and saving the rest for later.

The best practice is to read the whole thing, time permitting. It is the best source of information for every company; remember, Warren Buffett has spent his whole career reading 10-Ks.

Set a timer. Here we go.

Minutes 0 to 3: what does this company sell? (Item 1)

The 10-K opens with Item 1, the business description. Our main goal here. Answering this question: how do they make money?

Read the first couple of pages until you can explain the business in two sentences. A good practice: if you can explain it to a five-year-old, you understand the business.

For J&J: the company sells prescription drugs such as Tremfya and Stelara through its Innovative Medicine segment and surgical devices, orthopedics, and vision products like Acuvue contacts through its MedTech segment.

This includes brands you grew up with (Band-Aid, Tylenol) which left in 2023 when J&J spun off Kenvue.

If you can’t explain the business in two sentences after three minutes, that tells you something too. A dividend backed by a business you don’t understand is a dividend you will struggle to evaluate.

A shortcut if you are having issues figuring out what the company does: run it through your favorite AI and ask it to explain to you like a five-year-old. I do this all the time. If after that, you still can’t, move on. It’s not worth trying to force it.

Warren Buffett called it his “too hard” pile. Let it build up; it’s a strength, not a weakness.

Minutes 3 to 10: go straight to the cash flow statement (Item 8)

Skip the CEO letter; if there is one, pass the properties section and the MD&A (Management Discussion and Analysis), for now.

Scroll down to Item 8, the financial statements, and look for the consolidated statement of cash flows or the cash flow statement.

Bottom line, dividends get paid with cash, so this statement matters more than any other page in the 10-K.

Look for the line “cash flows from operations” (the total at the bottom of the operating section). You also might find it labeled operating cash flows, they don’t standardize the language, only the filing.

Next, find capital expenditures or additions to property, plant, and equipment (PP&E) in the investing section.

Now, subtract the capital expenditures (the second item) from the cash flows from operations (first item).

This gives us free cash flow, the cash left over after running and maintaining the business. This is the most important number you will find and calculate. Without it, no company survives for long. It is the lifeblood and pays for all the running, growth, and dividends.

Here is the numbers from J&J’s 2025 10-K, consolidated statements of cash flows:

• Cash flows from operations: $24.5 billion ($24,530 million)

• Additions to property, plant and equipment: $4.8 billion ($4,832 million)

• Free cash flow: $19.7 billion ($19,698 million)

That $19.7 billion is the cash the dividend gets paid from. Now let’s see how much of the total cash the dividend drains.

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Minutes 10 to 15: locate the dividend and run the payout math

Let’s stay on the cash flow statement and drop down to the financing section. Every dollar Johnson and Johnson sends to shareholders is listed here. We will find dividends paid and share buybacks, the other capital return method.

J&J’s line “dividends to shareholders” shows $12,381 million paid in fiscal 2025. To determine the free cash flow payout ratio (the best method of measuring the strength of the dividend payout).

To calculate the FCF Payout Ratio, we divide the dividend by free cash flow; here are the latest numbers:

• Dividends paid: $12.4 billion

• Free cash flow: $19.7 billion

• Free cash flow payout ratio: 63%

Here’s how you can read the ratio. Below 60% is ideal, depending on the company, and gives the company room to raise the dividend even in a rough year. Between 60% and 80% deserves a closer look to determine how stable the cash flows are. Above 80%, we start to enter the caution zone, meaning the cushion starts to get thin. And anything above 100% is a big red flag and must be investigated. A percentage greater than 100% means the company is borrowing or selling assets to pay the dividend, which is not sustainable.

Always check these over a longer time frame, ideally five to ten years. Use your favorite financial website to help with this; mine is Stock Simplifier.

One caveat: all of these ranges are broad, and each company and business model has to be determined on its own standing. For example, a REIT must pay out 90% of its cash in dividends, and banks don’t generate “cash” in the same manner because of their structure.

This is why it helps to understand the business model.

Currently, J&J sits at 63% with cash flows that barely move in recessions. That reads as safe to me.

Minutes 15 to 19: the income statement, and why I trust it less

Now, let’s flip back to the income statement for a quick look. we want to see the three trends of both revenue and net income (earnings).

J&J’s revenue, from the 2025 10-K:

• 2023: $85.2 billion

• 2024: $88.8 billion

• 2025: $94.2 billion

Growing, steady as they go. Now look at net income over the same stretch:

• 2023: $35.2 billion

• 2024: $14.1 billion

• 2025: $26.8 billion

Revenue climbed steadily while net income bounced around. Digging deeper into net income, we see that the 2023 figure was inflated by a one-time gain from the Kenvue separation, while 2024’s figure declined due to special charges, including litigation costs (talc litigation). Free cash flow barely moved through all of it.

This is why I focus on the free cash flow payout ratios and treat earnings payout ratios as a second opinion. Remember, earnings are an opinion; cash is a fact.

A screener using earnings would have shown J&J paying out 85% of its profits in 2024 ($4.91 in dividends against $5.79 in diluted EPS). The free cash flow payout that same year was 60%. Two numbers, different stories. One says things are tight (earnings), and the other says the weather is fine (free cash flow).

Minutes 19 to 24: the balance sheet

Moving to the balance sheet next.

We have two questions to answer here. How much cash and how much debt?

From J&J’s 2025 10-K balance sheet:

• Cash and cash equivalents: $19.7 billion (top of the statement)

• Long-term debt: $39.4 billion, up from $30.7 billion a year earlier (towards the bottom)

As we can see, an $8.8 billion jump in long-term debt is exactly the kind of thing this 30-minute run-through is designed to catch. When we discover a jump like this, go to the long-term debt footnote (search using CTRL-F). Here you will find a list of every new borrowing, the interest rates, and when each note comes due.

What we want to know is whether the new debt funded something productive, such as an acquisition or a new asset (capacity). Or whether it plugged a hole in a leaky business.

For a company like J&J, generating $19.7B in annual free cash flow, $39.4B in long-term debt remains manageable.

For a company generating $19.7 billion in annual free cash flow, $39.4 billion of long-term debt is a manageable load. For a company generating $2 billion, it would be a five-alarm fire.

The reason this matters, debt competes with your dividend for the same cash. Interest payments come first, always.

Minutes 24 to 28: risk factors and legal proceedings (Items 1A and 3)

The risks section is important, but remember you will not read all of Item 1A, nobody does. It’s written by lawyers to cover the company’s butt.

Better, skim the bolded headings and slow down only for risks specific to this company, skipping the boilerplate about pandemics and cyberattacks that appears in every filing.

Next, check Item 3, legal proceedings, which points you to the litigation note.

For J&J, that is where we will find talc litigation, and it is the single most important non-financial item in the filing. As a dividend investor, we don’t need to predict the outcome. We need to know that the exposure exists, roughly how large the reserves are, and whether it has grown since last year.

Four minutes here is enough to learn whether the company’s biggest legal exposure grew since last year, and that is all this pass needs.

Minutes 28 to 30: the dividend record (Item 5)

Let’s wrap up our tour with Item 5. Here the company discusses its stock and dividends. We can confirm the streak with the per-share history.

Here are J&J’s dividends paid per share, from the 2025 10-K:

• 2023: $4.70

• 2024: $4.91

• 2025: $5.14

This translates to approximately 4.5% to 4.7% dividend growth each year, and the April raise marked the company’s 63rd consecutive year of dividend increases. A streak like that survives only when the payout math we ran in minute 12 keeps working, which is why you check the math first and admire the streak second.

Okay, timer off, we did it in 30 minutes, one 10-K, and now you know more about J&J’s dividend than most investors who own the stock.

How to use this in your investing process

Simple, run this process before you buy any dividend stock, and once a year after the new 10-K drops. This will happen, depending on the company, in February to March for any company with December as their year-end.

Our 30-minute read works primarily as a filter. It helps answer one question: does this dividend deserve any more of my time? If the free cash flow payout ratio passes my filter, the debt is manageable, and nothing in the legal note makes you pause, the company earns a deeper look at valuation and competitive position.

If you find a 95% payout ratio and ballooning debt, you saved yourself a yield trap and a lot of heartache in half an hour.

A simple habit: keep your numbers in a simple spreadsheet, one row per year. By year three you have a trend, and trends are where the real signal lives. It can live in Excel or Google Sheets, whichever works best for you. Keep it someplace you will remember.

Lastly, if you have time, read section 7, the MD&A; this is management’s section to explain everything going on with the business. They will explain the company’s operations and why they are doing well or not; they will also lay out their future plans and how they plan to execute them. And finally, any capital allocation decisions. It is a treasure trove of information, but it does take some time to read through it.

What this pass can’t tell you

A few honest limitations.

The 30-minute read says nothing about valuation. J&J can have a safe dividend and still be a bad investment at the wrong price.

One year of free cash flow is a snapshot. A single strong year can mask a decaying business, which is why the spreadsheet habit matters.

And the 10-K won’t tell you about management skill or whether the moat is holding. Those take longer than 30 minutes, and they always will.

A good practice after your 30-minute pass is to look at longer time horizons; five to ten years is best. Then run valuation, and spend some time thinking about its competitive position.

The 30-minute 10-K checklist (save this)

• Item 1: Can I explain the business in two sentences? (3 min)

• Cash flow statement: Operating cash flow minus capex = free cash flow (7 min)

• Financing section: Dividends paid ÷ free cash flow = free cash flow payout ratio. Under 60% ideal, over 80% caution (5 min)

• Income statement: Is revenue growing? Is net income lumpy from one-time items? (4 min)

• Balance sheet: Cash vs long-term debt, and did debt grow year over year? (5 min)

• Items 1A and 3: Skim company-specific risks, read the litigation note (4 min)

• Item 5: Dividend per share history and the growth streak (2 min)

The big takeaway: a dividend is only as safe as the free cash flow behind it, and after spending 30 minutes with the 10-K, we can see that cash flow for ourselves.

Until next time, take care and be safe out there,

Dave

P.S. If this changed how you look at a 10-K even slightly, that's the whole point of the newsletter. One investing lesson every week, free, with the math shown. You can join here.

One is a roofing company most have never heard of, compounding its way toward Dividend King status. The other is a 150-year-old whiskey maker you have heard of trading at a yield it has never offered in my investing lifetime.

In today’s post, we will discuss:

• A quick refresher on what the Dividend Universe is and how names get in

• Why Carlisle Companies (CSL) earned its spot, and the moat protecting it

• Why Brown-Forman (BF.B) earned its spot, and the moat protecting it

• What would get either name removed down the road

Okay, let’s dive in and meet the new additions.

First, a quick refresher

The Dividend Universe is the master list of dividend growth companies we track and own. Every name on it clears the same three-part filter:

• Long record of dividend raises

• Free cash flow payout that the company carries with room to spare

• And a business I can explain to you in a few sentences

There are a few more steps to it, but those are the highlights; you can learn more on the complete filter here.

A seat on the list is that, a seat on the list. The company earned its place with quality, and then it waits, sometimes for a while, until the price works. The Buy Below column is what turns a seat into a purchase.

Bottom line, these are, I believe, the highest-quality dividend-paying companies in the markets, and the goal is simple: own as many of them as the markets allow, at prices that make sense.

No removals this update. Two additions, let’s meet them.

Addition #1: Carlisle Companies (CSL)

Who is Carlisle, you ask? Never heard of them? Most haven’t.

Carlisle makes commercial roofing systems and building envelope products- the membranes, insulation, and waterproofing that keep weather out of warehouses, schools, and office buildings. Or as a ten-year old would understand: Carlisle keeps the rain out of big buildings. It makes the roofing sheets, the insulation, and the sealants that go on top of warehouses, schools, and office buildings.

The company runs two segments:

• Construction Materials (CCM), the roofing business

• Weatherproofing Technologies (CWT), which covers sealants, coatings, and moisture barriers.

Over the past few years, Carlisle has sold off some non core segments in aerospace and interconnect to focus on becoming a pure play on the building envelope. I think that is smart, focusing on your core business. Focused businesses are easier to analyze, and now Carlisle focuses on what it’s “one thing.”

A big chunk of roofing demand comes from replacement. Commercial roofs wear out on a schedule, and building owners replace them whether the economy is booming or wobbling. That reroofing cycle gives Carlisle a recurring revenue base most industrial companies would kill for. Not what you expected huh? A recurring revenue base in an industrial, it’s why they have a strong moat and outstanding financials.

The Carlisle moat

The membrane on a roof is a simple product, and easily copied. Not much competitive advantage there.

Carlisle’s advantage lives in everything wrapped around the membrane.

When a building owner replaces a roof, the decision runs through a process:

• Architects who spec the system

• Contractors certified to install it.

Carlisle backs those jobs with system warranties that can run 20 or 30 years, and the warranty holds only when a certified contractor installs Carlisle components top to bottom. Specs, certifications, and warranties stack switching costs into every layer of the job.

This is part of what sets them apart.

Carlisle’s installed base does the rest of the work. Every Carlisle roof sitting on a warehouse today is a candidate for a Carlisle reroof when it wears out, sold through the same contractor who installed the first one.

You can see the moat in the margins.

The roofing segment posted a 27.4% EBITDA margin in the first quarter while revenue fell 5%, and this year’s growth guidance leans entirely on price increases that customers keep paying. Commodity businesses cannot raise prices into a down market.

Now, the dividend record.

Carlisle has raised its dividend for 49 straight years. The next raise, expected in August, would make it 50 and put Carlisle in Dividend King territory. This is rarified air, only about 50 U.S. companies have done that. The company is reporting shortly after this report is being created, so we will try to update.

Here’s the fiscal 2025 scorecard:

• Revenue: $5.0B

• Net income: $740.7M

• Free cash flow: $970.6M

• Operating margin: ~19%

Nearly 19 cents of every revenue dollar falls through to free cash flow, which is elite for an industrial company or any company excluding Visa and Mastercard.

And the dividend picture:

• Annual dividend: $4.23 per share

• Yield: ~1.3%

• Free cash flow payout ratio: ~19%

• Latest raise: 10% (15% CAGR over the past 5 years)

• 20-year track record of raises

The 1.3% yield will not get any income investor excited, look past it. Carlisle’s payout ratio in the high teens with a 15% 5-year raise rate means the dividend has decades of runway. Management is also buying back stock on top of it, with a $1 billion repurchase target for 2026. Capital allocation at it’s finest. And with net debt at 1.7x EBITDA, well within their own 1x to 2x comfort zone, this is a strong business with fantastic financials.

Management’s Vision 2030 plan targets $40 in adjusted earnings per share and ROIC (return on invested capital) above 25%. With current ROIC of 18% and adjusted EPS of $19.40, those are ambitious numbers. But with historical growth of 16% in earnings and 6% in ROIC, they have a realistic shot, and I wouldn’t bet against them.

Carlisle is the low-yield, high-growth flavor of dividend investing, and the raise rate is what we are buying.

What to keep an eye on: the construction cycle. First quarter revenue fell 4% on weather delays and soft new construction. Carlisle reports second quarter results this week.

That’s the free half: the Dividend Universe rules, the full Carlisle case, and a moat you can read straight off the margins, a roofing company one raise away from Dividend King status.

The second company is the more interesting one. They have raised their dividend for 42 straight years, the founding family that controls it has protected the payout since 1870, and the market has knocked the stock down to a yield we haven’t seen before.

Below the paywall, members get:

• The full Brown-Forman case, built on a moat with two walls (one of them is measured in barrel years, and no amount of money can shortcut it).

• The fiscal 2026 scorecard. The income statement had a rough year, and free cash flow nearly doubled anyway. One of those numbers decides whether the dividend is safe.

• The honest risks. What management’s own fiscal 2027 guidance admits, and the one scenario that would shrink the growth story for good.

• The removal tripwires for both new names, the exact triggers that would take Carlisle or Brown-Forman back off the list.

• Where the buy below prices land. Both additions get the full valuation treatment in the next issue of Best Buys Now.

Start with a 7-day free trial and read all five names before paying a dollar. Membership is $369 a year or $35 a month, with a 30-day money-back guarantee either way.

Unlock the full update

Want to see a complete member deep dive first? My full Johnson & Johnson analysis is unlocked, free, start to finish.

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That’s what this month’s issue covers. Five companies from our Dividend Universe trading below my buy-below prices, along with the story told from the SEC filings, and where the dividend safety scores land. We look at each number from the latest 10-s, 10-Qs, and earnings releases.

In today’s issue, we will cover:

• The July glance table, all five names at once

• CME Group, and why I own a Borderline safety score on purpose

• ADP, the Dividend King reporting fresh numbers two days after this issue

• Accenture, the 46% discount everyone is afraid of

• Domino’s, the quiet share gainer in a flat category

• Realty Income, the monthly payer with its best coverage in years

• How the safety score works, for new readers

Okay, let’s dive in and look at the list.

CME Group (CME)

Quick look stats

• Recent price: $255.71

• Buy below: $344.00

• Safety score: 2.2 / 5 · Borderline

• Yield: 4.44% including the variable dividend, about 2.0% on the regular alone (which boosts the current yield).

• Regular quarterly dividend: $1.30 ($5.20 annualized), plus a $6.15 variable paid March 2026

• Sector: Financials, futures exchanges

Why I like it

• Near-monopoly position in US interest rate futures, with fiscal 2025 marking the fourth straight year of record revenue at $6.52 billion, up 6% (FY2025 10-K, filed 2/26/26)

• A free cash flow machine: $4.28 billion in operating cash flow against just $83.5 million of capex in 2025, so almost every dollar of profit converts to cash

• Q1 2026 set an all-time volume record at 36.2 million contracts per day, up 22% (press release, 4/22/26)

• Market data revenue is compounding: $803 million in 2025, up 13%, then a record $238 million in Q2 2026, up 20% (Q2 2026 10-Q, filed 7/24/26)

• Interest coverage of roughly 24x with only $3.4 billion of total debt

The thesis

So what does CME do? The are the toll booth for hedging interest rates, equity indexes, energy and agriculture. And you know I am a sucker for a good toll booth. When the world is in turmoil, trading volumes rise, and CME collects a small fee on every contract. Simple and incredibly profitable as evidenced by their 60%+ operating margins.

Network effects and switching costs drive CME’s moat. Traders go where other traders are; better yet, liquidity begets liquidity. The more traders participating in a market, the tighter the spreads, the lower the execution costs, and the more attractive the market becomes for the next trader.

This liquidity attracts institutional traders entrenched in the ecosystem, with their systems, data, and connections entwined with CME’s.

Market volume is the main growth driver; the new growth story is market data. That segment grew 20% year over year in the second quarter, and it behaves like subscription software revenue sitting inside an exchange.

CME is expanding its market in three areas:

• Event contracts and retail expansion

• Crypto

• Single stock futures

Regulatory will also contribute, with the new mandated SEC Treasury clearing as the nearest-term catalyst.

Dividend safety: the Borderline score, explained

The 2.2 score looks ugly, and I want to take a moment to explain it.

Most investors don’t know this, but CME pays two dividends. A regular quarterly dividend, currently $1.30, and an annual variable dividend sized to whatever cash is left over each year. For 2025, that variable was $6.15 per share, around $2.2 billion, declared February 2026.

It’s a different capital allocation model than most, but with the incredible liquidity the company operates at, they have to put the money somewhere, and instead of building up cash, they pay us.

We need to count both, which makes the payout math looks not great:

• Earnings payout including the variable: roughly 98%

• Free cash flow payout including the variable: roughly 94–96%

• Regular-only earnings payout: about 47%

• Regular-only free cash flow payout: about 43%

The safety score treats the whole payment as what’s going to happen, and on that basis a 2.2 is fair.

My view is that the variable dividend is an option, by design. Keep in mind many companies pay variable dividends such as Costco and Blackrock.

In a bad year, the variable shrinks and the regular keeps growing, which is exactly what a policy like this is built to do. If you own CME, own it knowing the headline yield can flex down in a slow year. That’s optionality, and I think a smart move.

One housekeeping note. CME moved the variable payment from January to March starting in 2026, so some screeners show a phantom “cut” in the 2025 declared numbers. That is a calendar change, and the 10-K confirms it, so don’t let a data feed scare you out of the position.

Valuation: buy below $344

At $255+, CME trades around 26% below my estimated buy-below-price. The company’s current P/FCF is 22x, which runs below it’s five year historical average of 24.7x. A toll-booth business growing high single digits with 24x interest coverage doesn’t stay there long.

If we dig deeper using a DCF and rDCF for a sanity check, we see some potential dislocation of pricing. Estimating FCF growth of 12% (10-year historical ranges in the 11-12%), and a 60% free cash flow margin (which is insane), we get a fair value of $344.

And if we look at the rDCF for a sanity check, we see the market is pricing in the same 12% FCF growth over the next three years, with growth slowing to 6.3% over the next seven years.

If we ask ourselves if we think that is reasonable, I would say yes, based on their historical performance plus the future expectations.

Green flags

• Fourth consecutive year of record revenue and adjusted earnings

• Record Q1 2026 volume, up 22%, with non-US volume up 30%

• Market data revenue accelerating to 20% growth

• $1.24 billion of buybacks executed in the first half of 2026 at an average of $281

• Regular dividend covered more than twice over by earnings and free cash flow

Red flags

• Q2 2026 clearing and transaction fees fell year over year, $1.35 billion versus $1.39 billion, as volume came off Q2 2025’s record

• Rate per contract slipped from $0.702 in 2025 to $0.678 in Q2 2026, so volume is growing faster than revenue

• The total payout leaves no cushion, which is why the score sits at 2.2, and a weak volume year would shrink the variable dividend

Automatic Data Processing (ADP)

Quick stats

• Recent price: $250.09

• Buy below: $333.81

• Safety score: 4.2 / 5 · Safe

• Yield: 2.72%

• Quarterly dividend: $1.70 ($6.80 annualized), raised 10.4% in November 2025

• Streak: 51 consecutive years of increases

• Sector: Industrials, payroll and HR outsourcing

Why I like it

• 51 straight years of dividend increases, and the last raise was 10.4%, so the streak is aging like a compounder, and the raises are not token

• Q3 FY2026 revenue of $5.94 billion, up 7%, with diluted EPS up 10.5% to $3.38 (10-Q, filed 4/30/26)

• Management raised full-year guidance mid-year: revenue growth to 6–7% and adjusted EPS growth to 10–11%

• Trailing free cash flow of roughly $4.8 billion against $2.6 billion of dividends, a 53% payout

• Return on invested capital north of 30%, with long-term debt under one year of net income

The thesis

What does ADP do? They process paychecks for over a million businesses, and payroll is the last thing any company stops paying for. ADP’s client retention ran 92.1% (ridiculous) in 2025, which was near record levels.

ADP has one of the widest, most stable moats in the markets today. Driven by their incredible stickiness. Payroll switching costs are one of the most underrated structural advantages in enterprise software. If you’ve ever had to switch payroll providers or work for a company which has, then you understand the pain and stress I am speaking of. It requires extracting employee data and tax withholding, all while maintaining current payrolls. Not easy.

Growth comes from slow and steady price increases, 3-5% annually. Along with growth in the PEO sector, but the earnings growth tends to outpace revenues. Mainly because of profitabity and buybacks.

But the quiet earnings engine is float. ADP holds client payroll funds for a few days before disbursing them, and it earns interest on an average balance of about $48 billion. This engine has grown from $422 million in 2021 to $1.19 billion in 2025, and it is all margin.

The average yield on that float is still only 3.3%, because older low-rate bonds keep maturing into higher rates. The tailwind has more room to run.

Dividend safety

A 4.2 is what a Dividend King is supposed to look like.

• Fiscal 2025 earnings payout: 59%

• Fiscal 2025 free cash flow payout: 55%

• Interest coverage: about 12.6x

• Capex plus capitalized software: under 3% of revenue

With a 5-year CAGR of 11% increases, this is a safet dividend, with plenty of room to continue to run. And while the yield isn’t super exciting, it is the steady growth like a turtle that we like.

Valuation: buy below $333.81

At $250.09, ADP sits 25% below the buy-below price. You rarely get this company at a discount, and the market is offering one now because employment growth is cooling.

The current P/FCF of 19.7x is well below it’s historical average of 27.1x, making it attractive at these levels. The market is pricing in a cooling of the hiring cycle.

Digging in with a rDCF, we can see the market is pricing in 15% free cash flow growth over the next three years, and 12%+ for the remainder. I feel that this is a fair estimate based on past performance and future expectations.

The market doesn’t give us opportunities like this often.

Green flags

• 51st consecutive annual increase, at a double-digit raise rate

• Guidance raised mid-year on both revenue and EPS

• Trailing free cash flow of $4.8 billion, about 111% of net income

• Float income guided up 13% for fiscal 2026 with reinvestment tailwinds intact

• Retention near record at 92.1%

Red flags

• PEO segment profit fell 2.4% in Q3 while revenue grew, a margin squeeze in the second-biggest business

• Pays per control grew only about 1%, and June payroll data shows hiring is slowing

• If the Fed cuts aggressively through 2027, the float tailwind switches to a headwind

That’s two complete workups, free: the full thesis, the safety math, the Buy Below price, and the flags on each. That’s also two of the five. The board says the best three are still face-down.

Below the paywall, members get:

• The 46% discount. The highest safety score on this month’s list, a net-cash balance sheet, a dividend covered three times over by free cash flow, and a market convinced AI is killing the business. The filings say otherwise, and I show you exactly where.

• The royalty stream wearing a pizza costume. Thirteen straight raises, the last three at 25%, 15%, and 15%. Free cash flow jumped 31% last year and the dividend costs just 35% of it, yet the market prices this like a slowing restaurant chain.

• The monthly payer yielding almost 5%, with its best dividend coverage in years and a brand-new way of earning fees on other people’s money.

• The full board: all five names, Buy Below prices, and safety scores on the same 0-to-5 scale, so you can watch it the way I do.

Every number comes from the latest 10-Ks, 10-Qs, and earnings releases, with filing dates noted so you can check my work.

Start with a 7-day free trial and read all five names before paying a dollar. Membership is $369 a year or $35 a month, with a 30-day money-back guarantee either way.

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Cuts have historically come in clusers, and long gaps between clusters can trick or lull investors to stop analyzing companies, and the cash flow statement.

Here’s the history and what July looked like compared with recent years:

• 2020: 43 S&P 500 companies suspended their dividends

• 2025: 176 US companies cut or suspended

• July 2026: zero

That makes this a good month to practice our cut-spotting skills and learn the signals before we get burned.

Welcome to the first issue of The Dividend Danger Report. Every month, this free report will report on:

• Cuts this month (every US-listed payer, not just the S&P 500)

• Freeze Watch (skipped raises and token raises)

• The Danger List (names whose safety scores deteriorated)

• Scorecard on past calls (starting next issue)

We start with the biggest freeze of the year, at a familiar company and many own.

Okay, let’s dive in and look at what July did and did not tell us.

1. Cuts this month

As we mentioned above, the S&P 500 count for July was zero.

Broaden the horizon and the zero looks different. According to S&P Dow Jones Indices’ January 7, 2026 release, 176 US companies decreased or suspended their dividends in 2025, cutting $12.9 billion in payments. That was up 33% from 132 companies in 2024.

Companies kept cutting through 2025, mainly outside the usual places dividend investors look.

Here’s the base-rate picture from that same S&P DJI release:

• 2025 decreases/suspensions: 176 companies ($12.9 billion cut)

• 2024 decreases/suspensions: 132 companies

• 2025 increases: 2,293 (down from 2,450 in 2024)

• Q4 2025 alone: 634 increases vs. 38 decreases

Increases outnumber cuts by a wide margin in any normal year, which is why a drought feels safe. The Covid hits and 43 S&P 500 companies suspended their dividends in 2020. And worse still, the index’s full-year net dividend change flipped to a negative $40.8 billion. That cluster focus is what hits the hardest.

Meanwhile, all the unread signs say relax. The S&P 500 paid a record $78.92 per share in 2025, the 16th consecutive year the 409 dividend-paying companies (out of 500) have paid a dividend.

Those 16 straight years train a dividend investor to stop checking the numbers. It creates a sense of safety.

There was one cut in July, outside an area most dividend investors pay attention too.

Blackstone Private Credit Fund (BCRED) cut its July distribution to $0.18 from $0.20, per AltsWire. That’s the second cut in nine months, with NAV sliding and withdrawal restrictions imposed in June.

If we follow the money. Public dividend cuts became rare, and yield-chasers started hunting for 9% available in private credit, and moved the risk to a corner of the market thinner disclosure and exit gating. Not ideal for most investors.

2. Freeze Watch

A company freezing a dividend is the earliest warning we get. And July handed us a doozy.

UPS CFO Brian Dykes, on the record: “We don’t expect the dividend to increase, and we’re not going to increase it in 2026.”

This news ends a dividend raise streak of 16 years, all without tripping any of the usual signals.

Here’s what UPS brings into 2026, from company guidance and CFO comments reported by TheStreet:

• Payout ratio: 80% to 90% of net income

• UPS’s own long-term target: 50% to 60% of net income

• 2026 free cash flow guidance: roughly $5.5 billion

• 2026 planned dividend payments: roughly $5.4 billion

• Implied free cash flow payout: about 98%

• Pension contribution on top: $1.3 billion

At a 98% free cash flow payout, one soft quarter erases the cushion.

The 98% is why my safety score treats free cash flow payout as a hard-cap. A company, even one as strong as UPS, can fund a dividend out of paper earnings while the actual cash barely covers it. And with the CRO narrating, UPS is playing this out in public.

S&P DJI’s own analyst, Howard Silverblatt, senior index analyst, noted that companies “on a perceived schedule” of annual raises are making smaller increases, and some “appear to have put off their actions for now.” Calling out the cash issue at hand himself.

Companies changing their capital allocation decisions is why the rule exists, to catch any changes in advance.

3. The Danger List

Here is the list of companies who safety scores deteriorated this month, with the specific reasons why. The score describes highlights what the numbers how today, not forecasts.

Stock Simplifier (still in beta) will allow us to grade every public company coming soon, and we will share those scores starting in the next issue.

UPS. The score changed on the free cash flow payout factor: roughly $5.4 billion in planned dividends against roughly $5.5 billion in guided free cash flow, plus the $1.3 billion pension contribution. The CFO has confirmed the freeze for 2026. Wolfe Research put UPS on its July 6 dividend-risk list (via CNBC) the same week.

BCRED. Distribution down to $0.18 from $0.20, the second reduction in nine months, with NAV declining and withdrawals restricted since June. Also named on Wolfe’s list. A fund that cuts twice in nine months while limiting exits is telling you where it expects NAV to go.

Conagra (CAG). The yield crossed 10% this month (July 2026). A double-digit yield on a packaged-food company is the market pricing in a cut, and the score agrees with the market. I looked at Conagra in June and passed, and none of the inputs have improved since.

PepsiCo (PEP). The big sign of a potential cut: 93% of free cash flow, from my July Cheap or Trap breakdown. Pepsi has decades of raises and a brand almost nobody can touch, but the cash coverage leaves very little room for a bad year. The score shows trouble on the horizon, not a prediction of a cut.

Companies leave this list when the inputs improve or when the cut happens, either way, you will see the scoring here.

If you want to see how a story ends, I wrote the full autopsy of Leggett & Platt, a 52-year Dividend King that cut from $0.46 to $0.05 in one announcement. Read it here.

4. How this report works

Since this is Issue #1, here are the ground rules. Future issues will link back to this section.

What counts as a cut. Any reduction or suspension of a regular dividend or distribution by a company, and special dividends don’t count. Variable-by-design payers including some energy companies or BDCs will only count when the policy changes. I’ll flag these when judgment is required.

The universe. Every US-listed common stock and listed fund that pays a regular dividend, along with select global dividend payers. You can find the 1,000 companies we are following here. The S&P 500 gets its own treatement because that’s where most readers’ money resides. And the gap between indexes and individual companies tells us a story as well, which is useful.

How companies join the Danger List. A company joins when its safety score erodes on a specific input: free cash flow payout crossing a threshold, dividend coverage falling, a freeze announcement, or a credit event. I name the reason every time.

How companies exit. The numbers improve, the cut happens, or twelve months pass with no further deterioration. Exits get announced, and starting next issue, the scorecard section will grade every past call, hits and misses both.

What this report will never do. This report does not forecast cuts. The scores measure the present, so a company on the Danger List can fix its numbers and never cut, and the scorecard will record that improvement.

What this means for your process

One habit to start building this month, when a company you own announces a dividend, check the raise, and a treat any changes such as a skip or a small raise as a trigger.

The next step, pull the cash flow statement and run the free cash flow payout ratio. Compare the company’s dividends paid to free cash flow. Simple.

Companies follow a pattern when things start to turn:

• Dividend streak

• Small raise

• Dividend freeze

• Dividend Cut

UPS gave a one-cent token raise in February 2025, froze in 2026, and now sits at a 98% free cash flow payout. Leggett & Platt ran the same sequence all the way to the end.

Companies rarely announce a cut in advance, they almost always freeze the dividend first. The freeze is the signal we should build a habit around.

If you want the exact factors I use, grab the printable Dividend Safety Scorecard. It’s the same checklist behind every Danger List entry above.

Members get the full Universe (currently 30 companies) rescored every month.

Until next time, take care and be safe out there,

Dave

Sources: S&P Dow Jones Indices press release, January 7, 2026. TheStreet interview with UPS CFO Brian Dykes. AltsWire, BCRED July distribution. CNBC, Wolfe Research dividend-risk screen, July 6, 2026.

Fifteen of your thirty companies have already reported.

JPMorgan raised its dividend 10 percent and stapled a $50 billion buyback to it. Taiwan Semiconductor grew net income 77 percent and started paying its dividend in US dollars. Casey’s raised its payout for the 27th straight year.

The machine did not miss a payment.

Now comes the crowded part. Fifteen more report between Monday and August 5. Four of them land on a single Wednesday.

This issue is your map for all of it.

What earnings season means for an income machine

Wall Street treats earnings season like a scoreboard. Beat the EPS estimate by two cents, the stock pops. Miss by two cents, it drops.

We run a different scoreboard.

A dividend investor watches earnings season for one thing: evidence about the safety and growth of the payment. A company can miss the Street’s EPS number and strengthen its dividend in the same quarter. Domino’s just did exactly that, and we will get to it below the wall.

So before the parade of reports starts, here are the five questions I ask of every single release. Steal them.

1. Did free cash flow cover the dividend with room to spare?

Dividends are paid in cash. Earnings are an accounting opinion. When a company generates $10 billion in free cash flow and pays $3 billion in dividends, the payment survives almost any bad year.

2. What did guidance do?

The reported quarter is history. Guidance tells you what the board will be looking at when it sets the next raise. A raised outlook in July usually shows up as a bigger dividend increase six months later.

3. Where is the payout ratio headed?

A 45 percent payout ratio that is drifting toward 55 percent tells a different story than a 45 percent ratio holding steady. Direction beats level.

4. Are margins holding?

Margins are the early warning system. Payout trouble almost always shows up in gross and operating margins four to six quarters before it shows up in the dividend announcement.

5. Is capex crowding the payment?

Heavy investment years are fine when cash flow is growing into them. Watch the companies that raise capex guidance while free cash flow flattens. That squeeze has a way of landing on the dividend last, but landing all the same.

Every note in this issue, and every issue that follows, is built on those five questions.

The first big report: Taiwan Semiconductor

TSM reported second quarter results on July 16, and it gave us a clean demonstration of how to grade a report with the five questions.

The headline numbers were loud:

• Revenue: $40.2B, up 33.7% year over year in dollars

• Net income: roughly $22.3B, up 77.4%

• Gross margin: 67.7%, operating margin 60.3%

• Q3 revenue guidance: $44.6B to $45.8B

Loud numbers are nice. Here is what actually mattered for the income machine.

First, the company raised full-year capex guidance to $60 to $64 billion, up from $52 to $56 billion, and committed another $100 billion to its Arizona buildout. That is question five flashing yellow. Management also told us the 2nm ramp will shave 3 to 4 points off gross margin in the second half.

The stock fell 3 percent on that margin warning before recovering.

Here is what the sellers skipped.

The board is targeting at least NT$24 per share for the full 2026 dividend, and starting this year, foreign holders get paid in US dollars. No more currency conversion drag on your payment. For a company growing profit 77 percent while running a margin near 68 percent, a 3-point margin haircut to fund the next decade of capacity is a trade I will take every time.

Verdict: dividend safe, growth intact, capex worth watching in 2027. TSM sits well above its $374 Buy Below, so we watch and wait.

That is the treatment every one of your 30 names gets below.

In this issue

• The full 30-name earnings calendar, every date confirmed against company announcements

• Report cards on every name already on the board, including the one that missed the Street and strengthened its dividend anyway

• Four names with real open questions this season. One is a utility carrying an AT RISK safety score into its report.

• The scorecard: all 30 names, tiers, yields, and safety scores in one table

• The tripwire list we will grade Accenture against this fall

• Three dates for your calendar

You just read the free half: the five questions and one full report card. Members get the other 29.

The member side of every issue: the full Universe rundown, the complete scorecard with safety scores, the Buy Below watch, and the dates that matter next.

Membership is $369 a year or $35 a month, with a 30-day money-back guarantee. Want to see the depth first? Here’s a full specimen deep dive, free: Johnson & Johnson: A Dividend Machine

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Most income investors see an 8% yield and assume something is broken.

Sometimes they are right. A yield that high usually means the market is pricing in a cut, a stalled business, or a balance sheet that is one bad quarter from trouble. So when Western Midstream Partners (NYSE: WES) shows up on a screen at an 8.2% yield, the reflex is to keep scrolling.

Today we are going to slow down and look closer, because the reflex is wrong on this one.

In this post, we will cover:

• What Western Midstream actually owns and why those assets throw off cash

• How the money flows, using the latest SEC numbers from the Q1 2026 earnings release

• Whether the 8% distribution is safe, using a real safety scorecard

• The Occidental question that scares people away

• What the units are worth, and a framework for a buy-below price

Okay, let’s dive in and figure out whether this 8% payout is a trap or a gift.

The scorecard

Here is the one-breath version before we do the work:

• Yield: 8.2% (5-year average 8.1%)

• Dividend safety: 3.5 / 5, “Healthy” (Stock Simplifier)

• Distribution coverage: 1.5x

• Net debt / EBITDA: 3.3x

• Interest coverage: 5.9x

• Verdict: below, for members

• Buy below: below, for members

Western Midstream is a Delaware Basin pipeline and water business that pays you 8% to wait while it grows. The market treats it like a distressed yield. The cash flows say otherwise.

1. The bet

The bet here is simple.

You are buying a collection of hard-to-replace midstream assets in the best oil basin in North America, wrapped in fee-based contracts, at a price that pays you an 8% cash yield with room to grow. The reason it is cheap is a fear about who owns it, not a problem with what it earns.

If that fear is overblown, you are getting a high-quality cash machine on sale.

One wrinkle makes this different from the usual deep-value setup. The units have averaged an 8.1% yield for five years, so the market has doubted this business the entire time, through record EBITDA, falling leverage, and four straight years of raises.

That kind of persistent doubt is exactly what an income investor wants to find. A mispricing that closes next quarter pays you once. A mispricing that lasts for years pays you 8% annually, in cash, the whole time you wait to be proven right.

2. What Western Midstream does

Let’s start with the business, because most people who dismiss WES have never looked at what it owns.

Western Midstream is a master limited partnership. It gathers, processes, and transports the stuff that comes out of the ground after a producer drills a well. Think of it as the toll road between the wellhead and the market. WES does not bet on the price of oil. It gets paid for the volume that moves through its pipes.

The company runs three streams:

• Natural gas: gathering, compressing, treating, and processing

• Crude oil and natural-gas liquids: gathering, stabilizing, and transporting

• Produced water: gathering, recycling, treating, and disposal

That third stream is the one people underrate. Every barrel of oil in the Permian comes up with several barrels of salty water that has to go somewhere. Handling that water is a real, growing, fee-based business, and WES became one of the three largest water handlers in the Delaware Basin after buying Aris Water Solutions in October 2025.

Now, the geography matters.

More than 60% of WES’s 2026 expected EBITDA comes from the Delaware Basin, the western half of the Permian in Texas and New Mexico. That is the lowest-cost, highest-activity oil region in the country. Producers keep drilling there even when prices soften, which keeps volume flowing through the assets WES owns.

The contracts are the quiet advantage.

A substantial majority of WES’s cash flow is fee-based, meaning WES gets paid per unit of volume regardless of the commodity price. Many of those contracts carry minimum-volume commitments and acreage dedications, so a producer is on the hook to either move a set amount of volume or pay for it anyway. That structure is what turns a cyclical industry into a predictable cash stream.

3. How the money flows

Let’s look at the most recent quarter as our guinea pig, using the Q1 2026 earnings release filed with the SEC.

The headline is that this was the strongest quarter in the partnership’s history.

Here is the Q1 2026 scorecard:

• Total revenue: $1.12 billion (up from $917 million a year earlier)

• Fee-based service revenue: $933 million, about 83% of total revenue

• Net income to limited partners: $342.4 million

• Diluted earnings per unit: $0.85

• Adjusted EBITDA: $683.1 million (a record, up 15% year over year)

• Distributable cash flow: $508.9 million

• Operating cash flow: $469.9 million

• Free cash flow: $242.3 million

The number that tells the story is the fee-based revenue. When 83 cents of every revenue dollar comes from fixed fees, the business behaves more like a utility than an oil stock.

Volume backed up the results. WES gathered a record 272 thousand barrels per day of crude and NGLs in the Delaware Basin, up 6% from a year earlier, and moved a record 2.8 million barrels per day of produced water.

The balance sheet is where the safety story really lives.

As of March 31, 2026, from the Q1 2026 balance sheet:

• Total assets: $14.9 billion

• Long-term debt: $8.2 billion

• Net debt to EBITDA: roughly 3.3x, with a stated target near 3.0x

• Credit rating: investment grade

That leverage figure is one of the lowest in the midstream sector. A lot of pipeline MLPs run at 4x or higher. WES sits around 3x and wants to stay there, which is exactly what you want to see behind a high yield.

Management is also putting the cash flow to work. WES closed the Aris water acquisition in October 2025, and in May 2026 it announced a deal to buy Brazos Delaware II for about $1.6 billion, split between $800 million of cash and $800 million of WES units. That deal is expected to add roughly $100 million of annual EBITDA and close by the end of the second quarter of 2026.

For the full year 2025, WES generated record Adjusted EBITDA of $2.481 billion and record free cash flow of $1.526 billion. For 2026, management guided to Adjusted EBITDA of $2.50 billion to $2.70 billion and distributable cash flow of $1.85 billion to $2.05 billion, and said it expects to land near the high end.

Strong business. Strong basin. Strong balance sheet. Now the real question.

That’s the free half: the assets, the contracts, and a record quarter, every number from the SEC filings.

And it leaves the only question that matters: if the business is this steady, why is the market paying you 8% to own it? Somebody is wrong here, the market or the math. The rest of this piece finds out which.

Below the paywall, members get:

• The safety score, line by line. Four strong inputs, and the one factor that costs WES a perfect grade (there’s a cut in this payout’s past, and it changes how you should size the position).

• The Occidental question. The three fears that keep this yield at 8%, and the February transaction, most investors read backward.

• Why P/E lies about pipelines, and the cash metric this business actually trades on.

• Three valuations. The multiple, a full DCF where even my bear case lands above today’s price, and a reverse DCF that reveals what growth rate the market is really paying for. That last number decides the whole piece.

• The verdict, my buy-below price, and the three tripwires that would change my mind.

Membership is $369 a year or $35 a month, with a 30-day money-back guarantee.

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The payout ratio everyone quotes misses most of them, because a company can look fine on earnings while the cash tells a different story. So I stopped relying on one number and built a scorecard that grades any dividend on a 0 to 5 scale, where 0 is unsafe and 5 is safe.

In today’s post, we will discuss:

• What the 0 to 5 safety score actually measures

• The five metrics that go into it, and how each one is scored

• The one hard rule that caps the whole thing

• Two companies scored from front to back, Procter & Gamble and Verizon

• How to use the score in your own process, and where it goes wrong

Okay, let’s dive in.

What is the score?

The safety score is a single grade from 0 to 5 that answers one question: how likely is this dividend to survive a bad year.

A 5 means the payout is protected from several directions at once. A 0 means the company is paying you with money it does not really have. Everything in between is a matter of degree.

The score is my rules run on Stock Simplifier’s data. Five plain metrics, each scored on a fixed curve, are then weighted by how much that metric actually forces a cut in the real world.

Here is the weighting:

• FCF payout: 35%

• EPS payout: 15%

• Interest coverage: 20%

• ROIC: 10%

• Dividend growth streak: 20%

Coverage carries the most weight because a dividend is paid in cash, and coverage is the metric that asks whether a normal year of cash covers the check. The other four surround it. One second opinion on affordability, one balance sheet stress test, one read on business quality, and one long memory of how the company behaves when times get hard.

Let’s walk through each one.

The five metrics

FCF payout (35%)

This is the heavyweight.

Take the latest cash dividends paid and divide by the five-year median free cash flow. Free cash flow is operating cash flow minus capital spending, the money left after the business pays to keep the lights on and grow.

I use a five-year median on purpose. One good year can flatter a payout, and one bad year can scare you out of a fine one. The median smooths both.

Here is the curve:

• Under 40%: 5

• 40% to 60%: 4

• 60% to 75%: 3

• 75% to 90%: 2

• 90% to 100%: 1

• Over 100%: 0

A company paying out 35% of its cash has room to keep paying through a rough patch. A company paying out 95% is one bad quarter from a hard decision.

EPS payout (15%)

This is the second opinion.

Latest cash dividends divided by the five-year median net income, counting only the years with positive net income. Under 30% earns a 5, and it steps down to 0 once the payout climbs past 100% of earnings.

When the two payout metrics agree, you can trust the read. When they disagree sharply, that gap is telling you something about cash conversion, and it is worth a closer look before you buy.

Interest coverage (20%)

This is the balance sheet check.

Operating profit (EBIT) divided by interest expense. Over 15x scores a 5, and it steps down to a 1 at 2x, then 0 below that.

Why it matters: when a business hits a rough patch, the interest gets paid before the dividend does. Lenders are first in line and shareholders are last. A company earning 15 dollars of operating profit for every dollar of interest has enormous room if rates rise or profits dip. A company at 2x has almost none, and its dividend is the first thing on the chopping block.

ROIC (10%)

This is where business quality shows up.

Return on invested capital is NOPAT divided by invested capital, where NOPAT is EBIT times one minus a 21% assumed tax rate. Over 15% earns a 5 and it steps down from there.

A company that earns high returns on capital does not have to plow as much back in to grow. That leaves more cash for shareholders, year after year. High ROIC is the quiet engine behind a dividend that keeps rising.

Dividend growth streak (20%)

This one does double duty.

It counts how many years in a row the per-payment dividend has increased. Twenty-five years scores a 5. Ten years scores a 3. Two years scores a 1.

The streak rewards a track record, and it silently tests recession behavior at the same time. A company that cut in 2008 or 2020 had its streak reset to zero, and it is still rebuilding. The number of years is a receipt for how the company treated its dividend the last time the economy broke.

The one rule that caps everything

There is a hard floor under this whole model.

If the five-year median free cash flow is negative, the dividend is not being funded by the business. It is being funded by debt, by asset sales, or by diluting you. So the FCF payout metric scores a 0, and that 35% weight drags the whole grade down into unsafe territory no matter what else is going on.

A fifty-year streak does not save you here. Neither does a fortress balance sheet.

If the cash is not there, nothing else on the scorecard can pretend it is.

Let’s score two companies

Numbers make this real, so let’s run the scorecard on two dividends that look similar from a distance and score far apart up close.

Our guinea pigs are Procter & Gamble (PG) and Verizon (VZ). Both are giant, household-name payers. Both have raised their dividend for many years. On the surface, you might grade them the same.

The score pulls them apart.

Procter & Gamble

PG’s fiscal year ends in June, so we are using fiscal 2021 through 2025.

• FCF payout: dividends of $9.9B against five-year median FCF of $14.0B is about 70%, which lands in the 60% to 75% band. Score: 3.

• EPS payout: those same dividends against five-year median net income of $14.7B is about 67%. Score: 3.

• Interest coverage: fiscal 2025 EBIT of $20.5B against interest expense of $0.9B is roughly 22x, well over the 15x ceiling. Score: 5.

• ROIC: NOPAT of about $16.2B against invested capital near $87B is about 15%, above the 15% mark. Score: 5.

• Dividend growth streak: 69 straight years, a Dividend King several times over. Score: 5.

Blend those by weight and PG lands at 4.0 out of 5.

Notice what is holding it back. Not the balance sheet, not the quality, not the streak. It is the payout coverage, the heavyweight, sitting in the middle band because capital spending stepped up and pushed the cash payout toward 70%. Even a 70-year king does not get a free pass on the metric that matters most.

Verizon

Verizon’s fiscal year ends in December, so we are using 2020 through 2024.

• FCF payout: dividends of $11.2B against five-year median FCF of $19.3B is about 58%, inside the 40% to 60% band. Score: 4.

• EPS payout: those dividends against five-year median net income of $17.8B is about 67%. Score: 3.

• Interest coverage: 2024 EBIT of $28.7B against interest expense of $6.6B is about 4.4x, closer to the 2x floor than the 15x ceiling. Score: about 1.7.

• ROIC: NOPAT of about $22.7B against invested capital near $269B is about 8%, well short of the 15% mark. Score: about 2.8.

• Dividend growth streak: 11 straight years, respectable but not a king. Score: 4.

Blend those and Verizon lands at 3.1 out of 5.

Here is the part worth sitting with. On the single metric most investors check, cash payout, Verizon actually scores higher than PG. Its dividend eats a smaller slice of free cash flow.

If the payout ratio were the whole story, you would call Verizon the safer dividend. The scorecard says the opposite.

What separates them is everything the payout ratio cannot see. Verizon carries a mountain of debt, so its interest coverage sits near the floor at 4x while PG sits at 22x. And Verizon earns about 8% on its capital against PG’s 19%, so far less cash is left over after the business feeds itself. Two companies, similar payout ratios, and a full point of safety between them once you look at the balance sheet and the returns.

That gap is the entire reason a dividend needs five scores, not one.

You now have the five metrics, the curves, and two worked examples you can copy onto any dividend you own.

This week’s members’ deep dive is the instrument firing. I ran this exact scorecard, line by line, on a wide-moat compounder the market has cooled on, and the score landed in a place that surprised me. That workup, plus the one line on its scorecard I am watching into next year, went to members last Saturday.

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How to use the score in your process

Treat the number as a starting point, not a verdict.

A 4 or 5 means the dividend is well protected and you can spend your research time elsewhere. A 2 or 3 means dig in, because the score is flagging a specific weakness, and your job is to find out whether it is temporary or structural.

Anything at 1 or 0 is telling you the market may be right to doubt this payout.

The most useful move is to read the metric scores, not just the blend. PG and Verizon both land in the 3 to 4 range, but for opposite reasons. PG is capped by a mid-band payout on an otherwise pristine business. Verizon is dragged down by debt and low returns on an otherwise affordable dividend. Same neighborhood, completely different risks, and only the individual scores tell you which one you are holding.

Where the score falls short

No single grade captures everything, and this one has real limits.

It is backward-looking by design. The streak and the five-year medians reward what a company has already done, so a business in the middle of a turnaround can score worse than its future deserves, and a company about to stumble can still look clean for a year or two.

The curves also assume a normal, capital-light industrial or consumer business. Banks, insurers, REITs, and MLPs run on completely different plumbing, so a raw interest-coverage or FCF-payout reading misleads you badly. Stock Simplifier’s scoring adapts the metrics for those business models, and you should never grade a bank on the same curve you use for Procter & Gamble.

And a high score is a statement about safety, not value. A perfectly safe dividend on an overpriced stock is still a mediocre investment. Safety tells you the payout will likely survive. It says nothing about the price you paid for it.

Run the scorecard on three dividends you own this week and read the five metric scores, not just the final grade. The weak line is where your next hour of research belongs.

With that, we will wrap up today’s article.

If you have any questions or if I can help in any way, please let me know.

Take care and be safe out there,

Dave

P.S. If this scorecard changed how you would size up even one dividend you own, that is the whole point. Dividend School sends one teaching piece like it every week, free, and you can leave any time.

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1. The stock everyone loved at $290 now yields 4.6%

Accenture was one of the 20 worst performers in the S&P 500 in the first half of 2026.

Read that again. A company with $69.7 billion in revenue, a 20-year record of dividend increases, and more cash than debt lost over half its value in six months. The 52-week range tells the story in one line: $118.15 to $291.09. The stock closed at $142.14 on July 7, 2026.

Here’s the part that got my attention.

While the stock was falling, the business kept reporting growth. Revenue rose 7% through the first nine months of fiscal 2026. EPS grew 9% last quarter. The board raised the dividend 10% in September 2025 and free cash flow guidance still sits at $10.8 to $11.5 billion for the year.

A falling stock and a growing business can only mean one thing: the market is repricing the future, and it is doing so violently.

So the question this deep dive will answer is simple. Is Accenture a wounded blue chip offering a once-in-a-decade starting yield near 4.6%, or is it a value trap where AI slowly dissolves the business underneath the dividend?

Let’s dive in.

2. The bet

Accenture is a bet that large enterprises will pay a trusted partner to install AI for them, and that the disruption everyone fears becomes the biggest project pipeline in the company’s history.

For income investors, the math has never looked like this. You are being offered a forward yield of roughly 4.6% (against a five-year average near 1.5%) from a company paying out less than half its earnings, with a raise streak stretching back two decades.

If the business merely stagnates, the dividend still looks well covered. That is the bet.

3. What the company does

Accenture solves a problem every big company has: they know what technology they need, and they have no idea how to build it, run it, or roll it out to 100,000 employees.

Think of Accenture as the general contractor of the corporate world. When a bank wants to move its systems to the cloud, when a retailer wants an AI agent handling customer service, when a government agency needs its digital infrastructure rebuilt, they rarely do it themselves. They hire Accenture to design the plan, supply the specialists, and often run the finished system for years afterward.

The scale is hard to picture.

• People: approximately 799,000 employees worldwide

• Clients: approximately 9,000, concentrated among the world’s largest companies

• Revenue: $69.7 billion in fiscal 2025, from the fiscal 2025 fourth-quarter earnings release

Those numbers come straight from the company’s own materials, and they make Accenture the largest pure-play IT services and consulting firm on the planet.

One quirk worth knowing: Accenture’s fiscal year ends August 31. So fiscal 2026 is already three quarters reported as I write this, with the year closing next month. Keep that in mind whenever you compare its numbers to calendar-year companies.

The client list is the moat’s foundation, and we will get to that in section five. For now, know that Accenture serves most of the Fortune Global 500, and these relationships run so deep that the company reported 104 client bookings of $100 million or more through the first nine months of fiscal 2026, up 13% from the prior year (Q3 fiscal 2026 earnings release).

Companies do not sign nine-figure contracts with vendors they are about to abandon.

4. How they make money

Accenture sells two things: brains and operations. The company reports them as Consulting and Managed Services, and they are almost exactly the same size.

Consulting is project work. Design the strategy, build the system, integrate the software, then hand over the keys. It is higher touch and more sensitive to the economy, because projects are easy to delay when budgets tighten.

Managed Services is the recurring engine. Accenture runs your technology, your back office, your security operations, on multi-year contracts. This is the closest thing a consulting firm has to subscription revenue.

Here’s how the third quarter of fiscal 2026 split out, from the June 18, 2026 earnings release:

• Consulting: $9.33 billion, up 4% in U.S. dollars

• Managed Services: $9.39 billion, up 8% in U.S. dollars

• Total: $18.72 billion, up 6% in U.S. dollars and 3% in local currency

Managed Services is growing faster, and that matters for dividend investors: the more recurring the revenue, the steadier the cash flow that funds the payout.

Geographically, the Americas is the biggest market at $9.14 billion for the quarter, with EMEA at $6.87 billion and Asia Pacific at $2.71 billion. EMEA grew 10% in U.S. dollars last quarter, the fastest of the three, though a chunk of that was currency.

The company also slices revenue by industry: Products (consumer goods, retail, travel) is the largest group at $5.67 billion for the quarter, followed by Health & Public Service at $3.85 billion, Financial Services at $3.49 billion, Communications, Media & Technology at $3.22 billion, and Resources at $2.50 billion.

Notice how spread out that is. No single industry drives the bus, which is exactly what you want from a dividend payer: diversified demand smooths the cash flows.

Now for the headline numbers. Here’s the fiscal 2025 scorecard, from the fourth-quarter fiscal 2025 earnings release (September 25, 2025):

• Revenue: $69.7 billion, up 7% in U.S. dollars and local currency

• GAAP diluted EPS: $12.15, up 6%

• Adjusted EPS: $12.93, up 8% (excludes $0.78 of business optimization costs)

• Free cash flow: $10.9 billion

• Cash returned to shareholders: $8.3 billion ($3.7 billion dividends, $4.6 billion buybacks)

And the fiscal 2026 picture through three quarters, from the June 18, 2026 release:

• Nine-month revenue: $55.5 billion, up 7% in U.S. dollars and 4% in local currency

• Q3 GAAP diluted EPS: $3.80, up 9%

• Full-year GAAP EPS guidance: $13.38 to $13.50, a 10% to 11% increase

• Full-year free cash flow guidance: $10.8 to $11.5 billion

• Capital return guidance: at least $9.5 billion

A business the market has repriced as broken is guiding to double-digit EPS growth and record free cash flow.

5. Moat and competition

Accenture has a moat. It is narrower than the company’s size suggests, and knowing exactly where it sits is the key to this whole thesis.

Half of Accenture is protected. Half of it is a knife fight.

Where the moat is real: the managed-services book. Managed Services generated $34.6 billion in fiscal 2025, roughly half of total revenue, and it is backed by about $37 billion of remaining performance obligations (contracted work already signed), up around 19% in the latest reporting.

This is the operate-and-run business, and the switching costs here are the genuine article. Accenture teams sit inside the client’s systems every day, accumulating years of institutional knowledge about how that specific estate actually works. A client that wants to leave mid-program has to find a replacement vendor, transfer all of that knowledge, and accept disruption to systems running the business right now.

Leaving hurts more than the fees do. That friction is why these relationships persist across multi-year cycles, and why the recurring half of the business grew 8% last quarter while consulting grew 4%.

Where the moat is thin: the consulting half. Project-based consulting work gets rebid freely at the end of each phase. Deloitte (around $70 billion in global revenue) runs a near-identical model and competes for the same boardrooms. IBM Consulting chases the same integration work. TCS and Infosys were built on the offshore-cost playbook and can undercut on price all day, because low-cost delivery already is their business.

None of these rivals gives anything up by copying Accenture. When competitors can copy you freely and without penalty, that half of the business earns no moat.

Running the other moat sources through the checklist. Let’s be honest about what Accenture does and does not have:

• Network effects: none. Winning a new bank client adds nothing for the existing automaker client. Engagements are bilateral: one client, one team, one outcome.

• Low-cost production: none. Gross margin has held near 32% for five years. A real cost advantage would show up as expanding margins, and it has not.

• Brand: average. The name gets Accenture in the room and reduces perceived risk when a board signs a nine-figure transformation. Buyers still run competitive bids against Deloitte, IBM, and the Indian majors, so the brand supports positioning without granting pricing exclusivity.

• Scale: real, but internal. 799,000 people means Accenture can staff a 2,000-person global rollout next month. Clients benefit from that as execution quality; they never feel it as lock-in.

One sticky source (switching costs on the operate-and-run book) plus scale earns a narrow moat. The replicable consulting core keeps it from being wide.

What the returns on capital say. High returns held over time are the standard test, so let’s run the fiscal 2025 numbers:

• Operating margin: 14.7% GAAP (15.6% adjusted), from the Q4 fiscal 2025 release

• Return on equity: $7.7 billion net income against $31.2 billion of equity, roughly 25%

• Return on invested capital: about 21% by my math; Stock Simplifier’s stricter method says 17%

Those returns look wide-moat at first glance. The reconciliation is that consulting is asset-light, so even fiercely contested work produces high returns on capital while it lasts. The returns confirm a quality business; the flat gross margin confirms the competition is real. Both things are true.

The AI swing factor. AI is the variable that decides whether this narrow moat widens or erodes, and the signal today is mixed. Generative AI bookings hit $5.9 billion in fiscal 2025 (Q4 fiscal 2025 release) and management is targeting much more. If that work converts into deeper, stickier managed-services contracts, the switching-cost moat widens. If AI compresses the billable hours a transformation requires faster than new AI work replaces them, the consulting half thins out.

The two tells I am watching: whether AI bookings keep converting into the recurring book, and whether gross margin finally breaks out of its 32% flatline in either direction. Margin expansion would say AI delivery is creating a real cost gap. Margin erosion would say the offshore rivals are winning the pricing war.

My verdict: a narrow moat, stable for now, concentrated in exactly the half of the business that funds the dividend. Section 10 stress-tests what happens if the AI bears are right.

6. Financials

Let’s put the whole business on the table and ask one question: is this a high-quality company?

Is revenue growing? Yes, at a mid-single-digit clip.

• Fiscal 2024: $64.9 billion

• Fiscal 2025: $69.7 billion, up 7%

• Fiscal 2026 (nine months): $55.5 billion, up 7% in U.S. dollars and 4% in local currency

All figures from the Q4 fiscal 2025 and Q3 fiscal 2026 earnings releases. This is a grower, just a measured one. Management guides fiscal 2026 to 3% to 4% local-currency growth, or 4% to 5% excluding an estimated 1% drag from the U.S. federal business.

Are margins healthy and moving the right way? Yes.

• Q3 fiscal 2026 operating margin: 17.0%, up 20 basis points year over year

• Fiscal 2026 full-year guidance: 15.3% GAAP operating margin, 60 basis points of expansion over fiscal 2025

• Gross margin last quarter: 32.8%

For a people business with 799,000 salaries to pay, holding margins while growing is a sign of pricing power and cost discipline. The company also completed a business optimization program (mostly severance) that cost $615 million in Q4 fiscal 2025 and $308 million in Q1 fiscal 2026, which is why GAAP and adjusted numbers differ this year.

Is the balance sheet safe? This is where Accenture separates itself from almost every high-yield stock.

From the May 31, 2026 balance sheet in the Q3 fiscal 2026 release:

• Cash and equivalents: $10.2 billion

• Total debt: $5.1 billion ($5.03 billion long-term plus $113 million current)

• Net cash position: roughly $5 billion

• Total assets: $68.8 billion

• Shareholders’ equity: $31.9 billion (Accenture plc portion)

A 4.6% yielder with more cash than debt is rare. Most stocks with this yield carry leverage; Accenture could retire every dollar of debt tomorrow and still have $5 billion left over.

Interest coverage makes the point even louder. Fiscal 2025 operating income of roughly $10.2 billion against interest expense of $229 million (Q4 fiscal 2025 release) works out to coverage of about 45 times. Stock Simplifier shows 44.7x, which matches my math. Debt is a rounding error here.

Does it convert earnings to cash? Beautifully, and this is the number one thing I check for any dividend payer.

• Fiscal 2025 operating cash flow: $11.5 billion

• Fiscal 2025 capital expenditures: $0.6 billion

• Fiscal 2025 free cash flow: $10.9 billion

Free cash flow of $10.9 billion against net income of $7.7 billion means cash conversion above 140% of earnings. Consulting requires almost no capital: no factories, no inventory, no fleets. People walk in, bill hours, and the cash shows up.

Through nine months of fiscal 2026, operating cash flow is $9.3 billion with just $492 million of capex, so free cash flow is running at $8.8 billion with a quarter to go, tracking management’s $10.8 to $11.5 billion full-year guide.

Add it up. Growing revenue, expanding margins, net cash, 45x interest coverage, and a business that turns more than a dollar of every earnings dollar into cash.

This is a high-quality business. The financials are not the risk here.

That’s the free half: the business, the moat, and the financials, every number checked against the filings. The quality question is settled.

The money question is still open. A stock that yielded 1.5% for a decade now pays 4.6%, and that only happens when the market is wrong about the business or the dividend is about to stop growing. The rest of this deep dive tests which.

Below the paywall, members get:

• The dividend safety deep dive. Seven tests against the SEC filings, including the one four-year trend in the payout that made me pause.

• The growth runway. Where the raises come from when a $70 billion firm grows 4% a year.

• Management’s report card. What Julie Sweet did with $8.2 billion of your fellow shareholders’ cash this year.

• The honest bear case, ranked. Including the one risk nobody, not even management, can disprove yet.

• My three-lens valuation. The multiples, a DCF where I gave the bears the heaviest weight, and a reverse DCF that asks what today’s price actually assumes. That last answer is the single most surprising number in this piece.

• The verdict and my Buy Below price, plus the four tripwires that would send this thesis back to the shop.

Membership is $369 a year or $35 a month, with a 30-day money-back guarantee.

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Want to see a complete member deep dive before you decide? My full Johnson & Johnson analysis is unlocked, free, start to finish: JNJ Article

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That is where the mistake starts.

A low price tells you the market is nervous. It does not tell you whether the dividend is safe, whether the business is growing, or whether the moat still holds. Those answers decide whether a cheap stock is a gift or a trap.

Today we are going to run five dividend payers through the same valuation process I use, then pressure-test each one on safety, growth, moat, and risk. They span four sectors, and they range from genuinely cheap to merely fair. The tools will show you which is which.

None of these are buy recommendations. Think of them as candidates worth your homework and a live example of how to grade a cheap-looking stock before it earns a place in your portfolio.

In today’s post, we will discuss:

• The three-tool valuation process (P/FCF, DCF scenarios, reverse DCF)

• PepsiCo and Healthpeak, including how to value a REIT the right way

• Three more names behind the paywall, where the tools get more interesting

• A scorecard you can save and reuse

Okay, let’s dive in.

How to read a valuation before you trust it

I lean on three tools from Stock Simplifier, and each one answers a different question.

Price to free cash flow (trailing) asks, “Is the stock cheap versus its own history?” It plots today’s P/FCF multiple against the five-year average and colors the zones. Green is attractive, yellow is fair value, red is expensive. Simple, and it keeps you honest about what you are actually paying for a dollar of cash flow.

A discounted cash flow (DCF) asks, “What is the business worth if it grows at X?” I never trust a single DCF number. I look at a bear, base, and bull scenario, because the spread tells you how much of the value depends on optimism.

A reverse DCF flips the question: “What growth does today’s price already assume?” This one is my favorite. You solve for the growth rate baked into the current price, then ask whether the business can clear that bar.

Here is the part most lists skip.

Valuation is only half the job. A stock can screen cheap on all three tools and still be a bad idea if the dividend is stretched, the moat is cracking, or free cash flow is shrinking. So for each name below, we pair the valuation read with the dividend-safety math and the business risks. That is the whole point.

Let’s meet the candidates.

1. PepsiCo (PEP): the low bar hiding in plain sight

Pepsi needs no introduction. Lay’s, Doritos, Gatorade, Quaker, and the Pepsi brand itself, delivered through a direct-store network that stocks the shelf for you.

On valuation, the stock is cheap versus its own past.

• P/FCF (trailing): 19.9x versus a 5-year average of 32.8x (attractive zone)

• DCF base case (10% / 5% growth): $188.86, roughly 40% above the recent price near $135

• DCF bear case (5% / 0%): $126.95, about 6% below

• Reverse DCF: the price implies just 2.5% revenue growth a year for a decade

That 2.5% is the number to sit with. The market is pricing Pepsi to barely grow, and a 54-year dividend raiser trading like a no-growth business is worth a look.

Now the safety check, and here it gets more interesting.

Per PepsiCo’s FY2025 10-K (filed February 3, 2026), the company paid $7,638 million in dividends against roughly $8,200 million in free cash flow. That is a payout near 93% of free cash flow. On core earnings the payout is a more comfortable 68%, but the cash math leaves little cushion if free cash flow stalls.

The dividend itself is not in question. Pepsi has raised it for 54 straight years and lifted it 4% in February 2026 to $5.92 a share. What you are underwriting is the cash cushion behind that streak.

Growth is the soft spot. Revenue rose just 0.4% in 2024 and organic sales grew 1.7% in 2025, while a $1,993 million writedown tied largely to the Rockstar energy brand dragged GAAP earnings lower.

The risks worth weighing: GLP-1 weight-loss drugs denting snack and soda demand, tariffs pushing up commodity costs by 6 to 11 percentage points per segment, and acquisitions that keep producing impairments.

The verdict for your process: a wide-moat compounder priced for almost no growth, with a dividend that is safe on the streak but tight on cash. Worth the homework, especially if you believe Pepsi clears a 2.5% bar in its sleep.

2. Healthpeak (DOC): value a REIT the right way

Healthpeak is a healthcare REIT that owns outpatient medical buildings on hospital campuses and lab space in the top life-science markets.

Before the numbers, one correction that trips up most people.

You cannot value a REIT on standard free cash flow. Healthpeak’s reported GAAP free cash flow shows a tiny 2.3% margin, because real-estate depreciation is a massive non-cash charge that buries true cash generation. REITs solve this with two custom metrics.

• Funds from operations (FFO) adds depreciation back. Treat it as the REIT’s version of earnings, so P/FFO is the REIT’s P/E.

• Adjusted FFO (AFFO) strips out maintenance costs. Treat it as the REIT’s version of free cash flow, so P/AFFO is the REIT’s P/FCF.

Run the multiples off the per-share figures at a recent price near $21.77:

• P/FFO: 11.8x (using FFO of about $1.85 a share)

• P/AFFO: 13.3x (using AFFO near $1.64 a share)

• Reverse DCF on FFO: with 8.5% near-term growth, the price only needs 1.1% growth a year after year three

Both multiples sit at the low end of where healthcare REITs trade, and the reverse DCF shows the market expecting almost no growth past the near term.

The dividend needs its own honest look. Healthpeak pays monthly, $0.10167 a share, or $1.22 a year, a yield near 5.6%. Against 2026 FFO-as-adjusted guidance of $1.71 to $1.75 (midpoint $1.73), the payout runs in the low 70s percent, and on AFFO near $1.64 it lands around 74%. Well covered.

One thing the yield-chasers miss: this is not an unbroken grower. Healthpeak cut its dividend in 2020 (from $1.48 to $1.20 annualized) while it exited senior housing and repositioned. It moved to a monthly payout in 2025 and has held it steady since.

The moat is in the buildings. Outpatient medical space physically attached to a hospital campus keeps physician tenants in place, and retention ran near 79% in 2025. Life-science clusters in South San Francisco, Boston, and San Diego are hard to replicate.

The risks are real and current. Lab oversupply pushed same-store life-science income negative in early 2026, the stock is sensitive to interest rates, and the March 2026 Janus Living senior-housing spinoff (Healthpeak kept about 82%) changed the earnings mix.

The verdict for your process: a well-covered high-yield REIT trading cheap on the metrics that matter, with a lab-vacancy overhang you need to have a view on. The dividend cut in its history is a reminder to underwrite the coverage behind the yield.

Below the paywall, three more names and the board that ties it together:

• The cheapest, best-covered stock of the five. A Dividend Aristocrat with a 49-year raise streak that the market has priced for 0.4% annual growth. It swept all four questions on the scorecard.

• A 48-year raiser yielding over 5% where the tools disagree with the “deep value” label. The disagreement is the lesson, and it comes with 21% downside in the bear case.

• A quality compounder in disguise. A 30% free cash flow payout, 13% revenue growth, and a 15% dividend raise in April. The most cushion on the list, if the growth holds.

• The one-page scorecard grading all five on valuation, growth bar, and coverage. Save it and run your own candidates through it.

Members get this workup every month, plus the full Dividend Universe with Buy Below prices and safety scores, and a premium email every week on a predictable schedule.

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Here’s the part most investors miss: the warning signs sat in plain sight for six quarters.

And it keeps happening. The last nine months delivered a wave of cuts, and the same signals showed up before nearly every one of them.

In today’s post, we will discuss:

• The recent wave of cuts, and what it cost shareholders

• Why dividend streaks can’t protect you

• The five warning signs that show up before a cut

• How to run a 15-minute mid-year checkup on your dividend holdings

• What this checklist can’t tell you

Okay, let’s dive in and learn how to spot a dividend cut before it hits your portfolio.

The scoreboard: nine months of cuts

Income investors have taken a beating since last fall. A sample of the damage, with the one-day stock reaction where the market got to vote:

• Alight (ALIT): dividend eliminated in February 2026, stock down 38%

• Horizon Technology Finance (HRZN): monthly payout cut 45% (from $0.11 to $0.06), stock down 23%

• Camping World (CWH): dividend paused in February 2026, stock down 17%

• Diageo (DEO): interim dividend cut 51% (from $0.405 to $0.20 per share), stock down 16%

• Baxter (BAX): quarterly dividend cut 94% (from $0.17 to $0.01) in November 2025

• FMC (FMC): quarterly dividend cut 86% (from $0.58 to $0.08) in October 2025

Alexandria Real Estate joined in December 2025, cutting its quarterly dividend 45% (from $1.32 to $0.72 per share). Different companies, different industries, same shareholder outcome: the income disappeared and the stock got repriced in a single day.

The good news? Most of these cuts telegraphed themselves quarters ahead of time. Let’s learn how to read the signals.

Why streaks can’t protect you

A dividend cut hurts you twice.

Your income drops, which is bad enough. But the market also reprices the stock, because a cut signals the business can no longer support the payout. Look at that scoreboard again: double-digit one-day declines were the norm.

The streak is the trap. Investors see 52 years of increases and assume the 53rd is automatic. Boards feel the same pressure, which is why they keep paying long after the business stops supporting it. The streak becomes a reason to ignore the numbers.

Two definitions before we go further.

The payout ratio is dividends divided by net earnings. It tells you what portion of profit goes out the door to shareholders. Above 70% deserves attention. Above 100% means the company pays out more than it earns.

The free cash flow payout ratio is dividends divided by free cash flow (operating cash flow minus capital expenditures). This one matters more, because dividends are paid with cash, not accounting earnings.

Now let’s walk through the five signs, using Leggett & Platt as our guinea pig. Every number below comes from the company’s Q1 2024 earnings release, filed as an 8-K with the SEC on April 30, 2024.

Sign 1: the dividend costs more than the company earns

This is the loudest alarm on the board.

In the first quarter of 2024, the same quarter the cut was announced, Leggett & Platt reported:

• Net earnings: $31.6 million

• Dividends paid: $61.3 million

The company paid out nearly twice what it earned. No business sustains that. The gap gets filled with cash on hand or borrowed money, and both wells run dry.

When you see a payout ratio above 100%, the question changes from “will they cut?” to “when?”

Sign 2: free cash flow can’t cover the check

Earnings can be massaged. Cash is harder to fake.

Leggett & Platt’s Q1 2024 cash flow statement showed operating cash flow of negative $6.1 million, a $103 million drop from the $96.7 million generated in Q1 2023. Add $26 million of capital expenditures on top, and free cash flow was deeply negative in the same quarter the company wrote a $61.3 million dividend check.

Think of it like a household paying the mortgage with a credit card. It works for a month or two. It does not work as a lifestyle.

One weak quarter of cash flow can be timing. The trend is what you watch. If free cash flow covers the dividend with room to spare year after year, you sleep well. If coverage keeps tightening, pay closer attention.

Do you want this checklist run on a real company every month? Do you want the filings read for you, with the math shown? Do you want it before earnings season instead of after?

Yes, I want the monthly deep dive

Sign 3: debt climbs while earnings fall

Here’s where the pressure builds quietly.

Leggett & Platt’s net debt to trailing adjusted EBITDA, straight from its own earnings releases:

• Q4 2022: 2.66x

• Q2 2023: 3.10x

• Q4 2023: 3.16x

• Q1 2024: 3.61x

Six quarters, and leverage climbed 36%. Total debt sat at $2.1 billion at March 31, 2024, with $300 million of notes maturing that November. The company also stated a long-term leverage target of 2.0x.

Read that combination out loud. Leverage rising, a debt wall approaching, and a stated target far below the current ratio. Something had to give, and the dividend was the biggest lever available. Cutting it freed up roughly $110 million a year (2024 dividend guidance dropped from $245 million to $135 million in the same release).

When management has to choose between the balance sheet and the dividend, the balance sheet wins. Every time.

The recent wave keeps proving the rule. FMC’s board said it cut the dividend “to further prioritize debt reduction” (FMC Q3 2025 earnings release, filed October 29, 2025). Baxter cut to a penny while working toward a net leverage target of roughly 3.0x by the end of 2026 through debt repayment (Baxter 2025 10-K). Camping World paused its dividend and pointed to its “focus on reducing net debt leverage” (Camping World 8-K, February 24, 2026). Three different businesses, one common thread: too much debt meeting too little cash flow.

Sign 4: sales shrink quarter after quarter

A dividend is a claim on future cash flows. Shrinking sales shrink that claim.

Leggett & Platt’s year-over-year sales growth, from the same 8-K:

• Q4 2022: (10)%

• Q1 2023: (8)%

• Q2 2023: (8)%

• Q3 2023: (9)%

• Q4 2023: (7)%

• Q1 2024: (10)%

Six straight quarters of decline, driven by weak demand in residential end markets. No single quarter looked catastrophic. The pattern was the problem.

Diageo told the same story in 2026. When the spirits giant halved its interim dividend in February, the underlying numbers explained why (Diageo interim results, filed as a 6-K on February 25, 2026):

• U.S. organic spirits net sales: down 9.3%

• Tequila net sales: down 23.1%

• Greater China net sales: down 42.3%

The board’s own words: the dividend was reduced “to accelerate the strengthening of the balance sheet and create more financial flexibility.”

A company can defend its dividend through one bad year with cost cuts and borrowing. It cannot defend it through a multi-year decline in the actual business.

Sign 5: management changes its vocabulary

This one costs you nothing but reading time, and it might be the most reliable tell of the five.

Before a cut, the language around the dividend shifts. Watch for phrases like “reviewing capital allocation priorities,” “balance sheet flexibility,” and “evaluating all options.” Leggett & Platt’s cut announcement was titled, in part, “Updates Capital Allocation Priorities.”

Walgreens ran the same play. The company cut its dividend from $0.48 to $0.25 in January 2024, then suspended it on January 30, 2025. The suspension announcement said management “continues to evaluate and refine its capital allocation policy” (Walgreens Boots Alliance 8-K, January 30, 2025). Walgreens had raised its dividend for 47 straight years before the streak ended.

The market gives you a tell too. When a stock’s yield climbs far above its own history and its peers, that’s the market pricing in a cut. A yield that looks too good to be true usually is. The price fell for a reason, and the sellers did the math before you did.

The business development company space proved this recently. Four BDCs cut between October 2025 and March 2026:

• Monroe Capital (MRCC): cut 64% across two reductions ($0.25 to $0.18 to $0.09)

• OFS Capital (OFS): cut 50% ($0.34 to $0.17)

• Horizon Technology Finance (HRZN): monthly payout cut 45% ($0.11 to $0.06)

• BlackRock TCP (TCPC): cut 32% ($0.25 to $0.17)

Every one of them sported a double-digit yield before the cut, while shrinking net investment income squeezed the cash that funds those payouts. Investors who bought the yield got the cut. And here’s the kicker: the stocks still fell hard on the announcements. A high yield priced in trouble, and the trouble arrived anyway.

Notice Monroe’s path, two cuts in three months. Walgreens followed the same script, cutting 48% in January 2024 before suspending a year later. The first cut is rarely the last.

Your July mid-year checkup

Here’s how I’d use this, and July is the perfect time. Half the year’s filings are in, and Q2 earnings are about to land.

Pull up each dividend payer you own and spend 15 minutes per company:

1. Open the latest 10-Q or 10-K on sec.gov and find the cash flow statement.

2. Compare dividends paid against net earnings. Flag anything above 70%. Above 100% is a red alert.

3. Compare dividends paid against free cash flow (operating cash flow minus capex). Same thresholds.

4. Check the debt trend. Is net debt to EBITDA rising over the last four to six quarters? Are big maturities coming due?

5. Check the revenue trend over the same stretch. One down quarter is noise. Four or more is a pattern.

6. Read the last two earnings releases and count the capital allocation language.

One flag means watch closely. Three or more flags means decide now, on your terms, before the board decides for you.

What this checklist can’t tell you

I want to be honest about the limits here.

First, it can’t catch everything. Walgreens’ suspension announcement cited litigation and debt refinancing as key cash needs. Legal liabilities of that size don’t show up cleanly in a payout ratio.

Baxter is the humbling recent example. The company cut its quarterly dividend from $0.17 to $0.01 in November 2025 with a payout ratio around 33% of adjusted earnings ($0.68 in annual dividends against $2.05 in fiscal 2025 adjusted EPS), a level this checklist would have called safe. Management simply decided that reaching its 3.0x leverage target mattered more than the payout. A safe-looking ratio measures capacity, and boards can change priorities regardless of capacity.

(The GAAP numbers told a messier story: Baxter’s fourth quarter included a $485 million goodwill impairment. Adjusted earnings hid what reported earnings revealed, which is its own lesson.)

Second, some cuts come from strength, or at least from prudence. Alexandria Real Estate cut its quarterly dividend 45% in December 2025, from $1.32 to $0.72 per share, to preserve approximately $410 million of annual liquidity while guiding 2026 FFO to $6.25 to $6.55 per share (Alexandria 8-K, December 3, 2025). The new dividend is well covered by that FFO. Painful for income investors, yes, but a different animal than a company paying out money it doesn’t have.

Third, watch your metrics by sector. For REITs like Alexandria, earnings payout ratios are nearly useless because depreciation distorts net income. Use FFO or AFFO coverage. For banks, watch regulatory capital ratios alongside the payout.

The checklist narrows your focus. It doesn’t replace reading the filings.

The checklist, ready to save

• Payout ratio above 70% of earnings? Above 100%?

• Free cash flow covering the dividend, with the trend improving or tightening?

• Net debt to EBITDA rising over four to six quarters? Big maturities ahead?

• Revenue declining for four or more straight quarters?

• Capital allocation language creeping into earnings releases?

• Yield far above the company’s own history and its peers?

The takeaway: dividend cuts announce themselves quarters in advance to anyone reading the cash flow statement, so read it before the board does the math for you.

You now have the same five-sign checklist that flagged Leggett & Platt six quarters before the cut. The newsletter does this every week: one investing concept, taught with real numbers from real filings. If that’s useful, subscribe and the next one lands in your inbox. Free, and you can leave anytime.

As always, thank you for taking the time to read today’s post, and I hope you find something of value on your investing journey.

If I can further assist, please don’t hesitate to reach out.

Take care and be safe out there,

Dave

P.S. This month's paid deep dive points this exact checklist at the next deep dive company. If you want to see the five signs working on a live stock before the market votes, that's where to look.

In today’s post, we will discuss:

• The difference between a universe and a portfolio

• The seven rules we use to filter for the best dividend stocks

• Popular dividend stocks that failed the test (some may surprise you)

• The nine companies joining the universe

• The one company leaving, and why

Okay, let’s dive in.

A universe is a promise, a portfolio is a bet

Quick refresher for newer readers.

The Dividend School universe is the full list of companies I follow, value, and track with buy-below prices. The portfolio is the subset I own and buy. A company can sit in the universe for years as a HOLD, waiting for the price to come to us.

Expanding the universe means more shopping aisles and zero obligation to buy anything.

The seven rules we use to filter for the best dividend stocks

Every name in the universe has to clear the same bar. Here’s the honest part: I applied these rules for years before I ever wrote them down.

So when I decided to expand from 22 to 30, I did the exercise properly. I laid out all 22 holdings and asked one question: what do these companies have in common? Seven rules fell out, and they’re the same seven I use to filter every new candidate today.

1: Toll-road revenue

Fifteen of the 22 earn fees on other people’s activity. Visa and Mastercard clip payment volumes. S&P Global and Moody’s charge for ratings. Domino’s and McDonald’s collect franchise royalties. VICI and Realty Income collect triple-net rent where the tenant pays the expenses.

2: High returns on capital

The compounders and dividend growers all earn well above their cost of capital, most north of a 20% return on invested capital (ROIC). The income names substitute contracted or regulated cash flows for raw ROIC.

3: Oligopoly economics

Two or three player industries with rational pricing. We own two of the three ratings agencies and all three payment networks. That’s on purpose.

4: The yield barbell

Nineteen names yield between 0.7% and 3.3% and grow their dividends fast. Three names (VICI, Realty Income, Brookfield Asset Management) anchor the income side. Even the anchors are contract-secured. Nothing in the universe is owned for yield alone.

5: Safety before yield

Twenty of 22 carry a SAFE or VERY SAFE score. The safety score is a gate, never a tiebreaker.

6: A buy-below price on everything

Quality is never bought at any price. Moody’s, Microsoft, and Fastenal have all sat in the HOLD penalty box for trading well above their buy-below marks.

7: No price-takers

Zero energy producers, zero materials, zero classic consumer staples. If a company’s revenue depends on a price it doesn’t set, it doesn’t get in.

Write your rules down. It’s the cheapest portfolio insurance you’ll ever buy.

The stress test: popular names that failed

Before adding anything, I ran the names other dividend writers love through the seven rules. Some heavyweights didn’t make it.

Chevron (CVX) & Exxon (XOM) ✕

Commodity price-takers. Great income stocks for someone else’s framework. They fail Rules 1, 2, 3, and 7 by design.

Merck (MRK) ✕

Keytruda drives roughly 40% of pharma revenue and loses US exclusivity in late 2028. A single-product cliff is the opposite of a toll road.

AbbVie (ABBV) ✕

A fine company trading above the average analyst target after a big run, with dividend growth slowing toward 6%. Fails the valuation gate.

Texas Instruments (TXN) ✕

A 22-year raise streak, but the fab construction cycle has pushed the payout above free cash flow. Wrong moment, worth revisiting.

Becton Dickinson (BDX) ✕

54 straight years of increases and a 7.6% ROIC. Longevity without economics.

That last one stung a little. A Dividend King failed my test.

The lesson: a long dividend streak tells you about the past. Returns on capital tell you about the future.

The framework is free. The nine names, their buy-below prices, the one I'm selling, and the risk I'm taking on are for paid subscribers. See you on the other side.

Read more

In today’s post, we will discuss:

- Why high yield and dividend growth rarely show up together

- The one number that separates a safe 7% yield from a trap

- Three stocks yielding 7%+ right now, each with a different structure and a different risk

- How to size these in your own portfolio

Okay, let’s dive in.

Why 7% yields are usually a red flag

All good businesses face the same choice with their cash: reinvest it for growth or hand it to shareholders.

A company yielding 7% is handing most of it back. That usually means the market expects little growth, or worse, it expects a dividend cut and has already marked the stock down. The yield looks juicy because the price collapsed, and the price collapsed for a reason.

So how do we tell the difference between a gift and a trap?

Coverage.

Dividend coverage measures how much cash a company generates against what it pays out. A company producing $1.30 in cash for every $1.00 of dividends has a 1.3x coverage ratio. That 30% cushion absorbs a bad quarter without forcing a cut.

One wrinkle before we look at the stocks. Each of our three companies uses a different structure, and each structure has its own coverage metric:

- Master limited partnerships (MLPs): distributable cash flow (DCF) against distributions

- Business development companies (BDCs): net investment income (NII) against dividends

- Regular corporations: free cash flow against dividends

Get the metric right for the structure and the analysis gets much easier. Let’s look at our three guinea pigs.

Stock 1: MPLX (MPLX), the growth machine

MPLX is the midstream partnership spun out of Marathon Petroleum. It owns pipelines, processing plants, and storage assets that collect fees whether oil is $50 or $90. Think of it as a toll road for energy.

Here’s the scorecard from MPLX’s first-quarter 2026 earnings release, filed as an 8-K on sec.gov:

- Distributable cash flow: $1,408 million

- Adjusted EBITDA: $1,729 million

- Distribution coverage: 1.3x

- Leverage ratio: 3.7x

- Quarterly distribution: $1.0765 per unit

At recent prices, that distribution works out to a yield of around 7.3%.

Now for the part that earns MPLX the “growth” label. The current $1.0765 distribution reflects a 12.5% increase announced in late 2025, and management has stated its intention to keep growing the payout at a similar clip through 2027, backed by new Permian processing plants coming online.

A 7.3% yield growing 12.5% a year is rare air. If management delivers, your yield on cost passes 9% within two years.

The catch: MPLX issues a K-1 tax form, which adds paperwork at tax time compared with a standard 1099. MLPs also generally don’t belong in IRAs. Know that going in.

Do you want to know which 7% yields I'd actually buy? Do you want the sizing, and the coverage math behind it? Do you want that every single week? Upgrade to paid.

Yes, send me the weekly deep dive

Stock 2: Main Street Capital (MAIN), the monthly payer

Main Street Capital is a BDC. It lends to and invests in lower middle market companies, the kind too small for Wall Street but too big for the local bank. BDCs must pay out at least 90% of taxable income to shareholders, which is why their yields run high.

Main Street is the rare BDC I’d call high quality. It manages its own portfolio in-house, with no external manager collecting fees, and it has never reduced its regular monthly dividend since its 2007 IPO.

The numbers from Main Street’s first-quarter 2026 earnings release, filed as an 8-K on sec.gov:

- Distributable net investment income: $1.00 per share

- Net asset value: $33.46 per share

- Regular monthly dividends: $0.26 per share (up 4.0% from a year earlier)

- Supplemental dividend paid in Q1: $0.30 per share

- Total dividends paid in Q1 2026: $1.08 per share

Here’s where I want you to slow down and read carefully.

Main Street’s regular monthly dividends alone yield roughly 5.6% at recent prices. The supplemental dividends push the total past 7%, and by the company’s own math, total recent declarations represented an annualized yield of 7.9% as of early May 2026.

The regulars are covered comfortably. Quarterly regular dividends of $0.78 against DNII of $1.00 per share is about 1.28x coverage. The supplementals are the variable piece. They depend on portfolio performance, and management can dial them down without technically cutting anything.

So the honest framing: you’re buying a very safe 5.6% with a well-supported bonus that has been showing up quarter after quarter. That distinction matters when you’re counting on the income.

Stock 3: Pfizer (PFE), the prove-it pick

Every high-yield list needs its controversy. Here’s ours.

Pfizer yields roughly 7.1% as of early July 2026. That yield exists because the stock has been left for dead: COVID revenue evaporated, patent expirations loom, and investors want nothing to do with it.

The bear case shows up right in the cash flow statement. In fiscal 2025, Pfizer paid $9.77 billion in dividends while generating $9.08 billion in free cash flow. The company paid out roughly $700 million more than it produced. First-quarter 2026 told a similar story: $2.2 billion in free cash flow against $2.4 billion in dividends paid.

Why the 15-year streak won’t save it

Pfizer has raised its dividend for 15 straight years, and that streak fools a lot of investors into assuming safety.

The payout ratios tell the real story. In 2021, the dividend consumed just 29% of free cash flow. By 2023 that figure hit 193%, and in 2025 it still sat at 108%, with the earnings payout at 126%. When a company pays out more than it earns and more than it generates in cash, the difference comes from the balance sheet: debt, asset sales, or cash reserves. A dividend funded that way survives on management’s willingness to defend it, and willingness has a shelf life.

The yield itself is the second warning.

Pfizer’s yield averaged 4.9% over the past five years, and the dividend grew only 2.5% a year over that stretch, from $1.52 per share in 2020 to $1.72 in 2025. The payout never sprinted to 7.15%. The stock price fell to meet it. Pair that with a return on invested capital near 4%, and the yield starts looking less like a gift and more like the market’s estimate of the risk. This is exactly why the coverage test comes before the yield in our process, every single time.

Pfizer’s growth potential lives in the share price more than the payout. You’re collecting 7.1% while you wait to find out if the turnaround works. That’s a fundamentally different bet than MPLX or Main Street.

How to use this in your investing process

When any stock yielding 7%+ crosses your screen, run this sequence before you buy:

1. Identify the structure first. MLP, BDC, REIT, or corporation. This tells you which coverage metric to pull and what tax form you’ll receive.

2. Calculate coverage with the right metric. Anything below 1.2x for an MLP or BDC deserves skepticism. For a corporation, free cash flow below the dividend is a flashing yellow light, as we saw with Pfizer.

3. Check the trend. One good quarter of coverage means little. Pull the last eight quarters from the filings on sec.gov.

4. Check the balance sheet. MPLX’s 3.7x leverage is manageable for a pipeline business with fee-based contracts. The same number at a cyclical company would scare me.

5. Size accordingly. The safer the coverage, the larger the position can be. My rough guide: a covered, growing payer like MPLX can be a full position. A turnaround like Pfizer gets 1%, at most.

Common mistakes with high yielders

The biggest mistake is buying yield without understanding where it comes from. A 10% yield with 0.9x coverage will cost you more in price decline than it ever pays in income.

The second mistake is treating supplemental dividends as guaranteed. Main Street’s supplementals have been steady, but they’re structurally optional. Build your income plan on the regulars and treat the rest as a bonus.

The third one catches even experienced investors: taxes. MLP distributions come with K-1s and don’t belong in retirement accounts. BDC dividends are mostly taxed as ordinary income, so they fit best inside an IRA or 401(k). The same yield can produce very different after-tax income depending on where you hold it.

And a limitation worth naming: coverage ratios tell you about today. They can’t tell you whether Pfizer’s pipeline delivers or whether energy volumes hold up in a recession. Coverage buys the company time to work through problems. It doesn’t erase them.

The takeaway: a 7% yield is only as good as the cash flow behind it, so check the coverage before you fall in love with the income.

As always, thanks for taking the time to read this post, and I hope you find something of value in your investing journey.

If I can further assist, please don’t hesitate to reach out.

Until next time, take care and be safe,

Dave

P.S. - You just ran the coverage test on MPLX, Main Street, and Pfizer. Paid subscribers get this every week: a full analysis of one dividend stock, the verdict, the position sizing, and the coverage math shown step by step. If today's lesson was useful, that's what the paid tier is.

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*Data sources: MPLX Q1 2026 earnings release (8-K, sec.gov, May 2026); Main Street Capital Q1 2026 earnings release (8-K, sec.gov, May 2026); Pfizer Q1 2026 earnings release (May 2026) and fiscal 2025 cash flow data. Yields as of early July 2026 market prices.*