The short version: this is a boring business in the best sense. People don’t stop putting out the trash in a recession, the contracts run for years, and WM can raise prices without losing many customers. At $204 it was trading at its lowest earnings multiple in years. I think it’s undervalued, and I’m buying it.

The scorecard:

• Moat: Wide and stable. Long municipal contracts plus 257 landfills it owns.

• Growth: Average. The industry grows slowly, but Stericycle and renewable gas give it new avenues.

• Management: Good. Strong capital returns, mixed record on beating estimates, and a CEO transition to watch.

• Risk: Very low. No customer is anywhere near 10% of revenue. The real threat is “diversion,” meaning less waste reaching landfills.

• Valuation: Attractive. Around 28.9x earnings and 22.8x free cash flow when we recorded.

We also covered some good questions from chat: how WM’s returns on capital compare with its cost of capital, and why REITs like Realty Income get squeezed when rates rise.

Jump to:

• 0:00 — The question: Is WM a buy at $204?

• 0:19 — What Waste Management actually does

• 3:13 — Financial overview

• 4:19 — Pricing power and recession resistance

• 6:36 — The moat: contracts and landfills

• 7:49 — Growth

• 8:46 — Management

• 9:51 — Risks

• 11:36 — Valuation

• 13:19 — Reverse DCF sanity check

• 15:45 — My verdict

• 16:37 — Q&A: How does WM compare to competitors?

• 18:13 — Q&A: Returns on invested capital vs. cost of capital

• 21:27 — Q&A: Realty Income, Moody’s, and interest rates

I scored WM on every factor using Stock Simplifier. You can run it free on 10,000+ stocks at stocksimplifier.com/dave.

Dividend Live happens every Thursday at 10 am ET right here on Substack. Come hang out and bring your questions.

Disclosure: I own or am buying shares of WM. This is education, not financial advice.

Same basic idea: dividend-paying US stocks in a basket, and almost nine times the cost. Over 20 years, that gap costs us $2,785 on a $10,000 starting balance (more on that math below).

And the expensive one has the weakest five-year and ten-year returns of the five. Go figure.

Today we put five of the best-known dividend ETFs side by side and read them the way we read a company: what they own, how they pick it, what they pay us, and what they charge for the privilege.

In today’s issue, we will discuss:

• Myth Busting from the Start

• The five at a glance

• NAV: The Ins and Outs

• What the fees cost us

• SCHD: Schwab U.S. Dividend Equity ETF

• VYM: Vanguard High Dividend Yield ETF

• VIG: Vanguard Dividend Appreciation ETF

• DGRO: iShares Core Dividend Growth ETF

• NOBL: ProShares S&P 500 Dividend Aristocrats ETF

• Which fund for which job

Okay, let’s dive in and see what each of these funds is doing with our money.

Myth Busting from the Start

An ETF doesn’t raise its dividend. It passes through whatever its holdings paid that quarter, minus the fee.

So there is no streak to protect and no board deciding the payout. When a big holding cuts, the fund’s check shrinks. When the index swaps out a name in March, the check changes again.

We saw this with SCHD this year. The June 2026 payment was $0.2525 a share, down from $0.2602 in June 2025. Nothing broke; the mix of companies changed.

So when we talk about “dividend growth” below, we mean the fund’s total payout per share, year over year. It wobbles. What we want is the trend.

How did I pick these five? Four of them are among the largest plain dividend-stock ETFs with at least ten years of history, plus NOBL, because the Dividend Aristocrats name pulls in a lot of new money and the fee deserves a hard look.

What’s missing? Covered-call funds like JEPI. They pay big monthly checks, but most of that money comes from selling options, not from dividends. Different animal. We use JEPI below to teach NAV.

The five at a glance

Here is the scoreboard. Every figure comes from the fund issuers’ own pages, fact sheets, and prospectuses.

What jumps out before we go fund by fund?

• SCHD pays the most today and has grown its payout the fastest, tied with VIG.

• VIG pays the least today, by a wide margin.

• VYM, the fund with “High Dividend Yield” in its name, yields more than a full point less than SCHD.

• NOBL costs the most and has returned the least over both five and ten years.

NAV: The Ins and Outs

NAV is net asset value. It’s the fund’s total assets minus its liabilities, divided by shares outstanding.

Put plainly, NAV is what one share of the fund is worth if we added up every stock it holds tonight.

The market price is what we pay on the exchange during the day. Those two numbers can drift apart. When the price sits above NAV, we are paying a premium. Below NAV, a discount.

So should we worry about overpaying?

Large broker-dealers called authorized participants keep the price pinned to NAV. If the ETF trades above what its stocks are worth, they create new shares and sell them; if it trades below, they buy shares and redeem them for the underlying stocks. That trade keeps the gap tiny.

The numbers show it:

• SCHD: +0.03%

• VYM: +0.08%

• VIG: -0.06%

• DGRO: +0.06%

• NOBL: +0.02%

On a $10,000 purchase, the biggest gap on the list (VYM’s 0.08%) is $8. Less than a pizza.

ETFs have to post their NAV, premium or discount, and median bid/ask spread on their website daily, before the market opens. That’s an SEC rule, and it’s worth a 30-second look before buying any fund we don’t know well. A thinly traded ETF can sit at a real premium. A closed-end fund has no creation or redemption, so its price can wander far from NAV. These five stay pinned.

So for these funds, NAV on any given day isn’t a decision factor. NAV over time is.

Where NAV earns its keep: JEPI

JEPI launched in May 2020 at a NAV of $50.00 a share. On September 30, 2026, its NAV was $56.18. Up 12.4% in a bit over six years.

Meanwhile, it paid out a lot. Its 12-month yield is 8.04%.

So where did the money come from? JPMorgan’s own breakdown says the 12-month dividend income has averaged 1.43% since inception, and the options premium has averaged 7.16%. Most of the check is the fund selling away the upside on the S&P 500.

What did that cost? Since inception through August 31, 2026:

• JEPI at NAV: 11.25% a year

• S&P 500: 18.05% a year

A bird in the hand, yes. But that is a 6.8-point gap every year.

JEPI did what it said it would do. Big monthly checks, lower volatility, slower growth. Nothing wrong with that if it’s the job we hired it for. The lesson is that a high payout and a slow-growing NAV tell us the yield came out of growth we would otherwise have kept.

When we look at any income fund, we watch both numbers together: what it pays, and what happens to NAV while it pays it. Total return is the scoreboard.

What the fees cost us

The expense ratio comes out of the fund’s assets every day. That’s exactly why it is easy to ignore.

Here’s what each fund charges on $10,000 a year (balance × expense ratio):

• VYM: $10,000 × 0.04% = $4

• VIG: $10,000 × 0.04% = $4

• SCHD: $10,000 × 0.06% = $6

• DGRO: $10,000 × 0.08% = $8

• NOBL: $10,000 × 0.35% = $35

Small numbers. Does it matter?

Let’s run it out. Say $10,000 grows 8% a year before fees for 20 years:

• No fee at all: $46,610

• At 0.04% (VYM, VIG): $46,238

• At 0.35% (NOBL): $43,453

The gap between the cheapest and the priciest is $2,785. And that’s on a single $10,000 deposit. Most of us keep adding.

Here’s a neat trick to check any fund. Compare its return to its own index’s return. SCHD trailed its index by 0.08 to 0.09 points a year over 1, 3, 5, and 10 years. Its fee is 0.06%. The gap is the fee, almost to the penny, and that’s what a good index fund looks like.

Also worth knowing: Vanguard cut fees twice in two years. VIG went from 0.06% to 0.05% in February 2025, then to 0.04% in February 2026. VYM went from 0.06% to 0.04% in February 2026. Vanguard owns its funds, which are owned by shareholders, so cost cuts flow back to us.

The fee is not the whole story.

SCHD: Schwab U.S. Dividend Equity ETF

The crowd favorite, with $108.9 billion in assets, second only to VIG on this list.

How it picks stocks

SCHD tracks the Dow Jones U.S. Dividend 100 Index. The screen runs in four steps:

• Eligibility: at least 10 straight years of dividends, $500 million in float market cap, $2 million a day in trading. No REITs.

• Yield cut: rank everyone by dividend yield and keep the top half.

• Quality score: rank the survivors on free cash flow to total debt, return on equity, dividend yield, and five-year dividend growth.

• The top 100 by score make the index.

It weights by market cap with a cap of 4% per stock and 25% per sector, reset every quarter. The full rebuild happens every March.

Think of it as a quality screen on top of a yield screen. It’s the closest of the five to what we do by hand.

What we own

102 holdings. The top 10 make up 41.63% of the fund:

• Texas Instruments: 4.67%

• Qualcomm: 4.58%

• Procter & Gamble: 4.24%

• Merck: 4.16%

• Coca-Cola: 4.16%

• Chevron: 4.08%

• Amgen: 4.04%

• UnitedHealth: 3.96%

• PepsiCo: 3.87%

• Verizon: 3.87%

The biggest sectors as of June 30:

• Health Care: 20.72%

• Consumer Staples: 20.38%

• Energy: 14.07%

• Industrials: 11.55%

• Financials: 10.05%

Technology is 9.23%, lighter than the market.

What it pays us

The 30-day SEC yield is 3.34%, the highest of the five. The trailing 12-month yield is 3.00%.

Why two yields? The SEC yield annualizes the portfolio's last 30 days of income after expenses, so it reflects what the fund owns today. The trailing yield looks back at what the fund paid over the last year. After a March rebuild, the SEC yield tells a different story.

Payout per share, split-adjusted for the 3-for-1 split in October 2024:

• 2020: $0.6761

• 2021: $0.7497

• 2022: $0.8538

• 2023: $0.8860

• 2024: $0.9944

• 2025: $1.0476

That’s 9.2% a year ((1.0476 / 0.6761)^(1/5) − 1). Love the consistency of that trend, even with 2023’s slow year.

The last four payments total $1.0541, up 1.95% from the four before. Slower, and worth watching.

NAV, fees, and trading

• NAV: $32.84 (September 29)

• Premium: 0.03%

• Median bid/ask spread: 0.03%

• Expense ratio: 0.06%

• Turnover: 30%

Turnover is the highest of the five. That’s the price of a screen that re-ranks every March. Schwab’s own page shows 39.6% for the fiscal year that just ended, so it’s climbing.

Returns

• 1 year: 24.08%

• 5 years: 8.51% a year

• 10 years: 12.37% a year

The 10-year number is solid. The five-year number trails VYM, VIG, and DGRO by 2.4 to 3.3 points a year.

Why the lag? SCHD is heavy in staples, health care, and energy, and light in tech. Tech carried the market for most of those five years. Through August, though, SCHD was up 29.2% for the year at NAV. Concentration cuts both ways.

My take

SCHD is the best income fund on this list. Highest yield, fastest payout growth, a real quality screen, and a 0.06% fee.

The trade-off is concentration. Ten stocks make up over 40% of the fund, and 30% turnover tells us the list changes a lot year to year. We are trusting the screen more here than with any of the others.

VYM: Vanguard High Dividend Yield ETF

The broadest fund here, and the cheapest, tied with VIG at 0.04%. $79.0 billion in the ETF share class and $96.2 billion across all share classes.

How it picks stocks

VYM tracks the FTSE High Dividend Yield Index:

• Start with the FTSE US All Cap Index, large, mid, and small companies.

• Remove REITs.

• Remove anything that doesn’t pay a dividend or isn’t expected to pay one over the next 12 months.

• Rank by forecast dividend yield and keep the above-average yielders.

• Weight by market cap. No single-stock cap.

Most of the funds here cap any one stock at 3% or 4%. VYM doesn’t, and its top holdings list shows it.

What we own

605 holdings. The top 10 make up 25.9%:

• Broadcom: 7.3%

• JPMorgan Chase: 3.4%

• Johnson & Johnson: 2.5%

• Exxon Mobil: 2.4%

• Caterpillar: 2.0%

• Cisco: 1.9%

• AbbVie: 1.8%

• Bank of America: 1.6%

• UnitedHealth: 1.6%

• Home Depot: 1.5%

Broadcom at 7.3% of a high-yield fund? Yes. It pays a dividend, it made the yield cut, and it’s one of the biggest companies in the market. With market-cap weighting, size decides the weight; that’s great for returns and not so great for the yield.

The biggest sectors as of June 30:

• Financials: 20.6%

• Technology: 14.6%

• Industrials: 14.4%

• Health Care: 12.4%

• Consumer Staples: 8.5%

• Energy: 8.5%

What it pays us

The 30-day SEC yield is 2.20%. On a trailing basis, the last four payments total $3.6755 per share. Divided by the September 30 NAV of $155.12, that’s 2.37%.

Payout per share by year:

• 2020: $2.9061

• 2021: $3.0961

• 2022: $3.2518

• 2023: $3.4780

• 2024: $3.4945

• 2025: $3.5008

That’s 3.8% a year, the slowest of the five. And look at the last three years. Nearly flat.

NAV, fees, and trading

• NAV: $155.12 (September 30)

• Premium: 0.08%

• Expense ratio: 0.04%, cut from 0.06% in February

• Turnover: 11%

Returns

• 1 year: 21.52%

• 5 years: 11.78% a year, the best of the five

• 10 years: 11.61% a year

My take

So is VYM an income fund?

VYM is a broad, dirt-cheap way to own the higher-yielding end of the US market. Over five years, its returns beat everything else here.

But it’s not the income fund its name suggests. SCHD yields more today, and SCHD’s payout grew more than twice as fast. VYM is a value fund that happens to pay dividends. Nothing wrong with that; we just need to know what we’re buying.

That’s two complete workups free, plus the scoreboard, the NAV lesson, and the fee math.

The two funds I’ve written up so far are opposites. One pays 3.34% from 102 stocks. The other is called “High Dividend Yield,” holds 605 stocks, and yields 2.20% because its largest holding is Broadcom. Which one fits depends on the job we hire it for.

Below the line:

• The fund with the best 10-year record of the five, 13.38% a year, for 0.08%.

• The cheapest growth fund here, which intentionally throws out the top 25% of yielders. Its payout grew as fast as SCHD’s.

• The 0.35% fund, and why I’d pass on it.

• Which fund I’d use for which job: income now, income later, and the one fund I’d own if I could only own one.

Members, keep scrolling. Everyone else, seven days free. Membership is $369 a year or $35 a month, with a 30-day money-back guarantee.

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Its free cash flow didn’t cover the dividend last fiscal year.

So what good is the rule?

Plenty, if we use it for the role it was built for. The Chowder Rule is one of the handiest screens a dividend investor has; it takes two numbers we can find in five minutes and filters out most of the stocks we shouldn’t spend time on. It can’t tell us whether the dividend is safe, despite what many investors think.

In today’s article, we will cover:

• What the Chowder Rule Is

• How to Calculate the Chowder Number

• The Three Thresholds, and Where REITs Fit

• Five Dividend Universe Names Filtered Through the Rule

• Where the Chowder Rule Fails

• How to Use It in Your Process

Okay, let’s dive in and learn how to run the Chowder Rule the right way.

What the Chowder Rule Is

The rule comes from a Seeking Alpha contributor who went by the name “Chowder,” a regular in the dividend growth investing community there. Dividend investors have been quoting it ever since.

The idea is simple. Add the dividend yield to the five-year dividend growth rate:

Chowder number = dividend yield + five-year dividend growth rate

Then compare the result to a minimum. Clear the bar and the stock moves on to a closer look. Miss it, and we move on.

Why add the two together?

Because together they estimate what the stock returns each year if the yield stays where it is.

If you read “How to Value a Dividend Stock” back in August, this is the same idea that sits inside the dividend discount model: return equals yield plus growth. The Chowder number is the back-of-the-envelope version of that math.

A big caveat before we go any further. The growth half of the number looks backward. It tells us what management did over the last five years, not what they will do over the next five, and my crystal ball is as cloudy as anyone’s. Chowder’s own advice was to use the rule only after we’ve found a high-quality business worth owning.

How to Calculate the Chowder Number

Two inputs, and we can find both on the company’s investor relations page.

Let’s use ADP as our guinea pig.

Step 1: the yield. ADP pays $1.70 a quarter, so $6.80 a year. At $266.88 a share:

• Yield: 2.55% ($6.80 / $266.88)

Step 2: the five-year dividend growth rate. Five years ago ADP paid $0.93 a quarter. Now it pays $1.70. We want the compound annual growth rate, the same calculation we’d use on revenue or earnings:

• Five-year dividend growth: 12.82% (($1.70 / $0.93) ^ (1/5) − 1)

If exponents make your eyes glaze over, any CAGR calculator online does this in two seconds. Plug in $0.93 as the start, $1.70 as the end, and five years.

Alternatively, you can use your favorite financial website, such as Stock Simplifier.

Step 3: add them.

• Chowder number: 15.37 (2.55 + 12.82)

That’s it. Two numbers from the IR page, one piece of math, and we have a first read on whether ADP is growing its payout fast enough to be worth our time.

Is 15.37 good?

Depends on the stock, which brings us to the thresholds.

The Three Thresholds, and Where REITs Fit

The rule doesn’t use one bar for every stock. It uses three:

• Yield of 3% or higher: Chowder number of at least 12

• Yield under 3%: Chowder number of at least 15

• Utilities: Chowder number of at least 8

The logic holds up. A stock paying us 1% today has a lot of ground to make up, so it needs faster growth to earn its spot. A stock paying 5% is already handing us most of the return in cash, so the growth bar comes down.

Utilities get their own line because they’re regulated. Regulators set what they can earn, which caps growth; in exchange, the business is steady as they go. Some versions of the rule only give a utility the 8 line when it yields at least 4%; I use it for any utility and let the rest of the analysis do the work.

So where do REITs fit?

They don’t, officially. The original rule never addressed REITs, MLPs or BDCs. All three pay out most of their cash flow by design, which leaves little left over to grow the dividend fast.

I put REITs, MLPs and BDCs on the utility line of 8, and then I lean much harder on coverage, AFFO for a REIT (the REIT version of free cash flow), distributable cash flow for an MLP, and net investment income for a BDC. The lower bar only works if the cash behind the payment holds up.

Five Dividend Universe Names Filtered Through the Rule

Let’s run five names from the Dividend School Universe. Prices as of September 23, and each line shows the yield plus the five-year growth rate:

• ADP ($ADP): 2.55% + 12.82% = 15.37. Needs 15. Passes.

• Mastercard ($MA): 0.62% + 14.61% = 15.23. Needs 15. Passes.

• NextEra Energy ($NEE): 3.22% + 10.11% = 13.33. Utility, needs 8. Passes.

• Duke Energy ($DUK): 3.79% + 1.95% = 5.74. Utility, needs 8. Fails.

• Realty Income ($O): 5.86% + 2.84% = 8.70. Fails at 12, passes on the REIT line of 8.

What does this tell us?

Mastercard clears the 15 bar on growth alone, with a 0.62% yield ($3.48 a year / $560.06). The dividend went from $0.44 a quarter to $0.87 in five years. Love the consistency.

NextEra is a utility that grows like a dividend growth stock. 10.11% a year from a regulated business is well above what the rule asks for.

Duke is the classic utility story, 2 cents a year added to the quarterly payment like clockwork. Reliable, yes, and the rule says it’s too slow. We already carry Duke as “At Risk” on the Universe table, so the Chowder number and the safety score are pointing the same direction.

Realty Income is the real-life REIT problem from the last section. Its five-year growth is 2.84% ($0.2715 monthly today against $0.236 five years ago). On the strict rule, it’s out. On the REIT line, it’s in, and the next stop is AFFO coverage.

Where the Chowder Rule Fails

Three weak spots, and we need to know all of them before trusting the number:

• It can’t see coverage

• It rewards a falling stock price

• It looks backward

It Can’t See Coverage

Back to Nike. It’s not in our Universe, but we ran it in the September Dirt Cheap issue, and the numbers are fresh.

• Yield: 4.58% ($1.64 / $35.84)

• Five-year dividend growth: 8.32% (($0.41 / $0.275) ^ (1/5) − 1)

• Chowder number: 12.90. Needs 12. Passes.

Now the cash. In fiscal 2026, Nike generated $2,184M of free cash flow ($2,868M from operations minus $684M of capex) and paid $2,407M in dividends.

• Coverage: 0.91x ($2,184M / $2,407M)

Nike paid out more in dividends than it generated in free cash flow, and the Chowder Rule waved it right through.

How long can a company pay out more than it generates?

As long as the balance sheet cash or the borrowing lasts, and that works for a while, until it doesn’t. Compare that to ADP, which covers its dividend 1.82x ($4,776M of free cash flow / $2,626M of dividends).

WARNING: a Chowder number never tells us whether the dividend is covered. NEVER. That takes the cash flow statement.

It Rewards a Falling Stock Price

How did Nike pass in the first place?

Partly through the price. The stock sits near its 52-week low, and as the price falls, the yield goes up, and the Chowder number goes up with it.

At its 52-week high of $76.97, the same $1.64 dividend yields 2.13% ($1.64 / $76.97). Add the same 8.32% growth and the Chowder number is 10.45, well short of the 15 a sub-3% yielder needs.

Same company, same dividend, and the price alone decides whether it passes. A stock getting cheaper for a good reason looks better on the rule, which is the opposite of what we want in a screen for yield traps.

It Looks Backward

Nike’s raises over the last six years went 12%, 11%, 11%, 9%, 8%, and then 3% last November. The five-year average still says 8.32%. The most recent raise says the board is slowing down.

The same thing works in reverse. A company that freezes its dividend for a couple of years to pay down debt after an acquisition drags its five-year growth rate down for years afterward, and it can keep failing the rule long after the business comes out the other side stronger.

Put the most recent raise next to the five-year rate every time. If the latest raise sits well below the average, the Chowder number overstates growth.

Bottom line: you need to understand the business model and look deeply at the financials to understand trends, not just static numbers. A high ROIC or dividend yield in one year tells little about the quality of the business.

How to Use It in Your Process

I treat the Chowder Rule as a first screen, never a verdict. It sorts a long list into “look closer” and “not now,” and it does that job well. Everything after that takes the filings.

Here’s the order I run it in:

1. Start with businesses we’d want to own anyway. Chowder’s own advice, and layer one of the 4-Layer Filter. The rule says nothing about quality.

2. Run the Chowder number against the right threshold: 12, 15, or 8 for utilities, REITs, MLPs, and BDCs.

3. Check the latest raise against the five-year rate. A big gap means the growth is fading.

4. Check coverage. Free cash flow over dividends paid, or AFFO for a REIT. Under 1.2x and the dividend depends on things going right. That’s step one of “Don’t Chase High Yields”.

5. Then the price. A stock that passes everything above still needs to trade below what it’s worth.

What about a stock that misses?

It gets a second look before it gets tossed. Realty Income misses the strict 12 by 3.30 points, and I’d still rather know why before I throw out a REIT with 136 increases on the board. Frankly, the misses teach me more than the easy passes.

A pass on a high yield gets the most suspicion. That’s where the traps hide, because a falling price inflates the yield and the Chowder number right along with it.

One more habit. Rerun the number once a year, after the raise. Five minutes per stock, and it catches a slowing dividend long before the headlines do.

Final Thoughts

The Chowder Rule answers one question well: is this company paying and growing its dividend fast enough to be worth a closer look? It can’t answer whether the dividend is safe or whether the stock is cheap, and Nike shows what happens when we ask it to.

Use it to narrow the list. Then open the cash flow statement.

Nike passed the Chowder Rule and failed the cash test. We found that by pulling three years of Nike’s cash flow statements for the September Dirt Cheap issue.

That second step is what Dividend School Pro does, two paid issues a week, Thursday and Saturday. Thirty-five names in the Universe, each with a safety score and a Buy Below, and the filings open every time.

If you’d rather run the coverage check yourself, everything you need is in this article.

Upgrade to Dividend School Pro

If you have any questions or would like me to cover something in particular, please don’t hesitate to reach out.

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

Dave

The Fed raised rates on September 16, its first hike since 2023, and the 10-year Treasury ended the month above 5%. Dividend stocks did not enjoy that. Since our September Best Buys on the 3rd, Realty Income is down 10%, Brown & Brown 17%, and Casey’s 20%.

The machine kept paying anyway. Zero cuts. Microsoft, McDonald’s, and VICI all rose, and McDonald’s made it 50 straight years, becoming a Dividend King.

The Universe also grew. Carlisle, Lowe’s, Broadridge, WM and Main Street joined on September 26, and we are now 35 names. This week I re-ran the valuation on all 35, so every name has a fresh Buy Below.

And on October 1, Accenture reported. We have been waiting on this one since July.

In today’s issue, we will discuss:

• Accenture: grading the four tripwires

• What a rate hike does to the Universe

• The valuation reset: new Buy Below prices

• The raises: three more landed

• Report cards: Broadcom, Casey’s and Cintas

• The scorecard

• The Buy Below watch

Okay, let’s dive in.

Accenture: grading the four tripwires

Some history for newer readers.

Accenture has been one of our Best Buy Now names since July. In our July deep dive, I set four tripwires, the things that would make me change my mind:

• Two consecutive quarters of falling bookings

• Gross margin below 32%

• Payout ratio through 55% without earnings growth

• A dividend raise below 5% in September

Tripwire #1: bookings.

New bookings are the contracts Accenture signed during the quarter, the work it will bill for later. Falling bookings today mean falling revenue tomorrow, which is why we put them first on the list.

Here is the run-up to October 1:

• Q4 FY25: $21.31 billion

• Q1 FY26: $20.94 billion

• Q2 FY26: $22.11 billion

• Q3 FY26: $19.32 billion

Q3 was down, at $19.32 billion versus $19.7 billion a year earlier. The quarter before it was up. So that’s one, and the tripwire needs two in a row.

So did Q4 make it two?

No. Bookings came in at $22.17 billion, up 4% from $21.31 billion a year ago (5% in local currency). Accenture signed $1.20 of new work for every dollar it billed in the quarter.

Back to growing, which is what we wanted.

Tripwire #2: gross margin

Gross margin is what’s left of each revenue dollar after paying the people who do the work (revenue minus cost of services, divided by revenue).

• Q4 FY25: 31.89%

• Q1 FY26: 33.07% (32.92% a year earlier)

• Q2 FY26: 30.26% (29.86% a year earlier)

• Q3 FY26: 32.77% (32.87% a year earlier)

Q4 FY26 is the one we watch, because last year’s fourth quarter already slipped under 32%.

The fourth quarter came in at 32.04% ($5,984.8 million of gross profit / $18,679.1 million of revenue), up from 31.89% a year earlier. That clears the reworded test, and it's back above 32% on the old one too. The full year landed at 32.05%, up from 31.91%.

Tripwire #3: payout ratio

Accenture pays $1.63 a quarter, $6.52 a year. Over the last twelve months through Q3 it earned $12.52 a share (GAAP).

• Payout ratio going in: 52.1% ($6.52 / $12.52)

• Free cash flow, first nine months of FY26: $8.78 billion

• Dividends paid over the same nine months: $3.01 billion, 34% of free cash flow ($3.01 / $8.78)

Measured on free cash flow, we’re well covered. On earnings, 52% is a good number, and regardless of the dividend raise, I feel good about the coverage.

The new dividend is $1.71 a quarter, $6.84 a year. FY26 earnings came in at $13.56 a share (GAAP), up 11.6% from $12.15.

• Payout ratio now: 50.4% ($6.84 / $13.56)

• Free cash flow, FY26: $11.62 billion, above the top of the $10.8 to $11.5 billion guide

• Dividends paid, FY26: $3.99 billion, 34% of free cash flow ($3.99 / $11.62)

The payout ratio went down, not up. Clear.

Tripwire #4: the raise

The last two raises:

• September 2024: $1.29 to $1.48, up 14.7%

• September 2025: $1.48 to $1.63, up 10.1%

Below 5% trips it.

$1.63 to $1.71, up 4.9% ($1.71 / $1.63). Accenture’s release calls it 5%. The math says 4.9%.

By the letter of the tripwire, it tripped. By a tenth of a point.

The new dividend is payable November 13 to shareholders of record on October 13.

The five questions

How did the quarter hold up against the five questions we ask every company?

• Did free cash flow cover the dividend with room to spare? Yes. 2.9 times ($11.62 billion / $3.99 billion).

• What did guidance do? FY27 calls for 3% to 6% revenue growth in local currency, $14.39 to $14.81 of earnings per share (6% to 9% above FY26 GAAP), and $11.0 to $11.8 billion of free cash flow.

• Where is the payout ratio headed? Down. 52.1% going in, 50.4% now, and 46.8% on the middle of next year’s earnings guide ($6.84 / $14.60).

• Are margins holding? Yes. Operating margin was 15.4% for the year, up from 14.7% (15.8% adjusted, up from 15.6%), and FY27 guides to 15.9% to 16.1%.

• Is capex crowding the payment? No. $742.7 million in FY26, up from $600.0 million, which is 1% of revenue. FY27 guides to $900 million.

Verdict for our process

One tripwire out of four, and it tripped by a tenth of a point.

Bookings grew, margins grew, the payout ratio fell, and free cash flow beat the top of the guide. I’m not going to pretend 4.9% is 5%, so the tripwire counts, and we’ll hold Accenture to a higher bar on next year’s raise. But a raise that misses by a tenth of a point, paid out of a falling payout ratio, isn’t a reason to sell.

Accenture stays a Buy. At $214.50 as of Thursday, it sits 6+% below the $227.35 Buy Below.

That’s Accenture, graded in full. The same treatment for the rest of the Universe is below.

That’s Accenture, free.

Below the line: the three raises since Issue #3, each measured against that company’s own record, and one of them came in at 2.2%, down from 4.0% last year. Report cards for Broadcom, Casey’s and Cintas. What the Fed’s hike did to our REITs, our utilities and the ratings agencies. A fresh Buy Below for all 35 names, including the five new ones, and two of those five go straight to Best Buy Now.

Casey’s beat on earnings and fell 14% the next day. I would read that section first.

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It now trades 21.6% below our Buy Below and at 21.8 times free cash flow, against a five-year average of 26.7. The business didn’t get worse. It raised its outlook twice last year and landed at the top of the range.

The market is worried AI will replace it. I’m pounding the table.

That name is below the wall, along with a second Dividend King and a toll booth that pays us twice a year. First, the setup.

Every month we pick five names from the Dividend Universe trading below their Buy Below prices, the five I’d put new money into first, then tell each story straight from the filings. This week I re-ran the valuation on all 35 Universe names, so every Buy Below here is fresh. Every number comes from the latest 10-Ks, 10-Qs, and earnings releases, so feel free to check my work.

In today’s issue, we will cover:

• The October glance table

• Pick 1: WM (WM)

• Pick 2: Realty Income (O)

• Pick 3

• Pick 4

• Pick 5

• The full board

• How the safety score works, for new readers

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

Pick 1: Waste Management (WM)

Quick stats

• Recent price: $206.44

• Buy below: $213.16

• Safety score: 3.7 / 5, Healthy

• Yield: 1.83%

• Dividend: $0.945 per quarter, $3.78 annualized, last raise 14.5%

• Streak: 23 straight years of raises

• Sector: Waste collection and disposal

Why I like it

• Free cash flow of $2.02 billion in the first half of 2026, up 57% from $1.29 billion a year earlier

• Core price up 5.7% on collection and disposal in Q2, while volume fell

• Full-year free cash flow guidance of $3.75 to $3.85 billion held, and the margin guide raised to 31.0% to 31.2%

• 253 solid waste landfills and four hazardous waste landfills owned or operated

• Dividend raised 14.5% for 2026, the 23rd straight year, with $1 billion of buybacks in the first half

The thesis

So what does WM do?

It hauls away the trash from our homes and businesses, then charges again to bury it in a landfill it owns. That second part is the moat. Try getting a permit for a new landfill anywhere near a town, and you’ll see how few the country is going to get. One man’s trash is another man’s treasure, and WM owns the treasure.

What else do we get?

Pricing power while volumes shrink, which we don’t see often. Collection and disposal volume fell 1.8% in Q2, and WM still raised core price 5.7%. Customers don’t shop around for their trash hauler. Many times, we don’t have options. For example, when my wife and I moved to North Carolina, WM was our only option.

Why is free cash flow jumping?

Two reasons. WM spent heavily on renewable natural gas plants and recycling automation from 2022 through 2025, with $633 million of that growth spending in 2025 alone. That program is winding down, guided to $200 million this year, so more of the operating cash flow drops to free cash flow. The second reason is Stericycle, the medical waste business WM bought for $6.9 billion in November 2024. It’s now called WM Healthcare Solutions, and its adjusted margin reached 19% in Q2.

Boring business, beautiful cash flow.

Dividend safety

We score it 3.7 out of 5, Healthy. The dividend itself is well covered. The balance sheet is what holds the score down:

• Dividends paid, trailing twelve months: $1.43 billion

• Free cash flow, trailing twelve months: $3.67 billion

• Payout on free cash flow: 39%

• Payout on earnings: 50%

• Net debt to EBITDA: 2.9 times

• Interest coverage: 5 times

So why only Healthy?

The two weakest inputs in our score are leverage and interest coverage, and both trace back to the Stericycle debt. Interest expense rose from $598 million in 2024 to $912 million in 2025. WM says leverage is back inside its 2.5 to 3 times target, and a 39% payout gives the dividend plenty of room. A Healthy score here encourages you to watch the debt, not the dividend.

Valuation: buy below $213.16

At $206.44, we’re paying $82.5 billion for the whole company (399.7M shares x $206.44). Against $3.67 billion of trailing free cash flow, that’s 22.5 times free cash flow.

Over the past five years, investors paid an average of 32.6 times for this business, so we’re buying well below the usual price. Big caveat here: part of that gap comes from free cash flow recovering as the green-energy spending rolls off, not only from the price falling. We shouldn’t count that whole discount as a bargain.

Our discounted cash flow model puts fair value at $274. Run our model backward, and today’s price implies 10% free cash flow growth for the next three years, and then 4.3% for the rest of the decade. Hint: this is all well below historical performance.

Is a 3.2% discount to the Buy Below enough?

For me, yes. The Buy Below already builds in our margin of safety, and the stock trades 20% below my fair value estimate. We have a cushion.

Green flags

• First-half free cash flow up 57%, and full-year guidance held even after revenue guidance was trimmed

• Core price up 5.7% in Q2, 6.3% in Q1

• Adjusted margin guidance raised 20 basis points, to 31.0% to 31.2%

• The Stericycle business went from a 1% reported margin in 2024 to 13.5% in 2025

• WM plans to return 90% of 2026 free cash flow to shareholders, dividends plus $2 billion of buybacks

Red flags

• Volume is shrinking. Collection and disposal volume fell 1.5% in Q1 and 1.8% in Q2, and WM cut its 2026 revenue guidance to $26.275 to $26.475 billion.

• $23.4 billion of debt, and interest expense that rose from $598 million in 2024 to $912 million in 2025. This is the input that keeps the score at Healthy.

• Legacy baggage from Stericycle and the landfills. Stericycle paid $56.9 million and signed a one-year deferred prosecution agreement with the DOJ in May over controlled-substance reporting from 2015 to 2020. The EPA also issued an order on the San Jacinto River Superfund site in April, where WM has $100 million recorded. On top of that, CEO Jim Fish retires in January, handing the job to President John Morris. Q3 results land October 27.

Pick 2: Realty Income (O)

Quick stats

• Recent price: $55.35

• Buy below: $64.25

• Safety score: 4.3 / 5, Safe

• Yield: 5.89%

• Dividend: $0.2715 per month, $3.258 annualized, last raise 0.2% (September 8)

• Streak: 136 increases since 1994, 675 monthly dividends in a row

• Sector: Net-lease REIT

Why I like it

• 2026 AFFO guidance raised twice, to $4.44 to $4.45 per share from $4.38 to $4.42

• 98.8% occupancy across 15,588 properties and 1,798 clients

• Net debt of 5.4 times adjusted EBITDAre, rated A3 by Moody’s and A- by S&P

• Fitch assigned an A rating in August, the first net-lease REIT with an A-category rating

• Q2 acquisitions at a 7.3% initial cash yield, with investment guidance raised to $10 billion

The thesis

Realty Income was in our Buy tier in September, and it moves up this month for two reasons: the price fell, and I cut the Buy Below.

The stock went from $63.17 on August 20 to $55.35 on September 28, down 12.4% in five weeks. Nothing happened to the rent. Occupancy is 98.8%, and management raised AFFO guidance in August.

So why did it fall?

Rates. REITs trade like bonds when rates move, and rates moved up in September. When Treasurys pay more, a 5.9% yield looks less special, and investors sell first and read the filings later.

What does Realty Income do?

It owns buildings and leases them to 1,798 tenants, mostly on long-term net leases. A net lease means the tenant pays property taxes, insurance, and maintenance. Realty Income collects the rent and mails most of it to us every month. Grocery stores, convenience stores, dollar stores, home improvement, a Vegas casino, and now data centers. Diversification at its finest.

I love a monthly paycheck, frankly.

Dividend safety

We score it 4.3 out of 5, Safe. But as REIT investors, we have to understand how the metrics are different. REIT’s speak a different language; FFO and AFFO are our earnings and cash flows.

• Dividends paid, trailing twelve months: $3.24 per share

• GAAP net income, trailing twelve months: $1.37 per share

• Payout on net income: 236%

• AFFO, trailing twelve months: $4.38 per share

• Payout on AFFO: 74%

Same dividend, two very different answers. Which one do we trust?

AFFO. It’s the REIT equivalent of free cash flow for a “normal” business, and the AFFO payout ratio is the REIT version of the dividend payout ratio we already know. Net income subtracts depreciation on 15,588 properties, which is an accounting charge, not cash leaving the building. Well-located real estate doesn’t wear out on the accountants' schedule. AFFO adds that back and subtracts the real cash costs, so it tells us what’s left to pay the dividend. Seventy-four cents of every dollar is a comfortable place for a REIT.

The caveat: this dividend barely grows anymore. The September raise was $0.0005 a month, 0.18%, and for the last 10 years, we have seen 3.0% growth.

Realty Income is an income anchor, not a dividend grower, and slow dividend growth is one of the two inputs holding the score below the top of the range. Leverage at 5.4 times EBITDAre is the other.

Valuation: buy below $64.25

At $55.35, we’re paying 12.5 times AFFO ($55.35 / $4.445 guidance midpoint). Over the past five years, the average was 15.3 times.

Is that cheap?

Cheaper than usual, with one asterisk. That average includes 2021 at 19.9 times, when rates sat near zero. Leave 2021 out and the four-year average is 14.1 times, so the discount is smaller than it first looks, but it’s still there.

Flip the multiple over and we get an AFFO yield of 8%. We collect 5.9% in cash and the company keeps the rest to buy more buildings.

Our discounted cash flow model using AFFO (FCF doesn’t work for REITs) puts fair value at $69. Our reverse DCF says today’s price implies 4.0% for the next three years, and 0.9% for the rest of the decade. I have more faith in management than that.

At 13.9% below the Buy Below, I’m happy to collect 5.9% while we wait for rates to settle down.

Green flags

• AFFO guidance raised in May and again in August

• Fitch’s A rating, on top of A3 and A- from Moody’s and S&P

• Investment guidance raised from $8 billion to $10 billion for the year

• Private capital is growing. KKR agreed in September to pay €528 million for 49% of a European portfolio, with Realty Income keeping the management fees.

• Re-leased properties at 102.7% of the old rent in Q2

Red flags

• Tenant credit. Walgreens, 3% of rent, was taken private in 2025 and no longer carries a credit rating. Family Dollar, 2.6% of rent, closed 350 stores in ten months under its new owner. Neither tenant has filed for bankruptcy, and neither shows up as a problem in Realty Income’s own filings. We watch them anyway.

• Dilution. The share count went from 591 million at the end of 2021 to 946 million in June, up 60%, while AFFO per share grew 4.5% a year. In August, it added $1 billion of convertible notes that can turn into shares at $83.55.

• Refinancing. $3.9 billion of debt comes due in 2027 at an average rate of 2.93%, and replacing it will cost more. The stock also trades below the $58.34 price of the shares it already sold forward, which makes new equity harder to use.

That’s two complete workups, free: the full thesis, the safety math, the Buy Below price, and the flags on each.

Below the paywall, members get:

• A Dividend King that just raised its dividend 14% for the 50th straight year, pays out 21% of its free cash flow, and has cut its share count by a quarter since 2020. Plus the $10 billion rumor hanging over it.

• The exchange behind the world’s interest rate, oil, and stock index futures: a 65% operating margin, two dividends that added up to 4.31% last year, and a Borderline 2.2 safety score that isn’t what it looks like.

• The Dividend King from the top of this issue: 51 straight raises, 21.6% below its Buy Below, and 8.9% cheaper than when we featured it in September.

• The full board: all 35 Universe names, tiered, each against its Buy Below.

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

Membership is $369 a year or $35 a month, with a 7-day free trial and a 30-day money-back guarantee.

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Only one of them passes all four layers of the screener or filter we’re building today, and surprise it isn’t the one with the biggest yield.

In today’s article, we will cover:

• Where the Four Layers Come From

• Layer #1: The Business

• Layer #2: Dividend Safety

• Layer #3: Management

• Layer #4: The Price

• How to Use the Filter in Your Process

• Common Mistakes to Avoid

The template is free.

4 Layer Dividend Stock Filter

125KB ∙ PDF file

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If you already run every dividend stock you buy through a checklist, you don’t need this newsletter.

If you’ve been meaning to build one and haven’t gotten around to it, that is what we do here. One company a week, filings open, math shown.

Put me on the list

Okay, let’s dive in and build a filter we can run on any dividend stock.

Where the Four Layers Come From

In his 1977 letter to shareholders, Warren Buffett laid out how Berkshire picks stocks:

“We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.”

Four filters, one sentence. In 2022, I built my own stock-buying checklist around those four filters and called them pillars: business, management, financials, and valuation.

When I wrote that piece, Mohnish Pabrai’s checklist ran 95 to 100 questions and took him 20 minutes to work through. I love the idea. Most of us won’t do it every time.

So what does a checklist look like when we’re buying for the dividend?

Same four filters, adjusted for what a dividend investor needs to know:

• The business: is this a business worth owning?

• Dividend safety: does the cash cover the payment?

• Management: is management growing the dividend and treating shareholders right?

• The price: is it cheap enough today?

We run them in that order, and we stop at the first fail. No point checking the price on a business we don’t want to own.

Four guinea pigs today:

• Automatic Data Processing ($ADP)

• Carlisle Companies ($CSL)

• Microsoft ($MSFT)

• Pfizer ($PFE)

One caveat up front. Every pass line below is a starting point, not gospel. A bank, a REIT, and a software company don’t look alike on paper, and the trick is knowing which metric fits which business.

Layer #1: The Business

Can we explain how the company makes money in two sentences? If not, we move on. That is Buffett’s first filter, and we don’t need a spreadsheet to figure it out.

Then three numbers:

• ROIC above 15%. Return on invested capital tells us how much profit the company squeezes out of every dollar tied up in the business (after-tax operating income ÷ debt plus equity, minus cash).

• Operating margins steady or rising.

• Revenue growing.

Big exception here: banks, insurers, and other financials. Debt is their raw material, so ROIC tells us very little. For financials, we swap in return on equity, and the pass line goes up to 15%.

Now our guinea pigs.

ADP runs payroll and HR for businesses of every size. Revenue grew from $15.0 billion in fiscal 2021 to $21.9 billion in fiscal 2026, 7.9% a year. Pre-tax margins were 26.1% ($5,730M pre-tax income ÷ $21,947M revenue). ROIC comes in at 65% ($4,414M of after-tax profit ÷ $6,765M of invested capital).

That ROIC is a little inflated. ADP holds client payroll money before it goes out the door and earns interest on it, $1.35 billion in fiscal 2026. Remove the interest-income boost, and it equals 41.3%. Either way, it clears 10% with plenty of room to spare.

Microsoft sells software and cloud computing to just about everyone. Revenue went from $168.1 billion to $331.8 billion over the same five years, 14.6% a year. Operating margin of 46.8% ($155.2B ÷ $331.8B), and it has risen three years running. ROIC of 30.8% ($125.1B after-tax operating income ÷ $405.8B invested capital). Easy pass.

Carlisle makes commercial roofing and building envelope products. ROIC of 22.0% ($784.5M after-tax operating income ÷ $3,564.9M invested capital). Operating margin of 20.0% ($1,002.5M ÷ $5,019.9M).

Carlisle passes, with a caveat. Organic revenue fell 2.9% in 2025 and another 5.0% in the first quarter of 2026, and the operating margin slipped from 22.8% the year before. Management blames “continued softness in residential and non-residential new construction markets.” Construction runs in cycles, so I’m giving it a pass, but it’s a pass we will keep an eye on.

Pfizer is the judgment call. Revenue went from $100.3 billion in 2022 to $62.6 billion in 2025 as COVID vaccine and treatment sales rolled off. Pre-tax income fell from $34.7 billion to $7.5 billion.

Does that make it a bad business?

Not necessarily. A lot of that 2022 revenue was never coming back, and everyone knew it. So let’s give Pfizer the benefit of the doubt and move it to layer two.

Layer #2: Dividend Safety

Does the cash cover the payment? If you read “Don’t Chase High Yields” on September 22, this is step one of that test.

We use the coverage ratio:

Coverage = free cash flow ÷ dividends paid

• Above 1.5x: comfortable

• 1.2x to 1.5x: fine, watch it

• Below 1.2x: the dividend now depends on things going right

Free cash flow is cash from operations minus capital expenditures. For REITs, swap in AFFO (the REIT version of free cash flow), for MLPs, distributable cash flow, and for BDCs, net investment income.

ADP: 1.82x ($4,776M of free cash flow ÷ $2,626M of dividends). One adjustment worth knowing: ADP reports a second spending line beside capex, “additions to intangibles,” so we subtract both. Comfortable.

Microsoft: 2.53x ($66,987M ÷ $26,445M). Comfortable, but look at the trend:

• Fiscal 2024: 3.4x

• Fiscal 2025: 3.0x

• Fiscal 2026: 2.5x

What happened?

The AI build-out. Capital expenditures went from $44.5 billion in fiscal 2024 to $115.9 billion in fiscal 2026. Cash from operations rose 54% over those two years, and free cash flow still fell 9.6%. Management says capex grows again in fiscal 2027. Microsoft passes easily, but coverage is a trend, not a snapshot, and this one is heading the wrong way. The big payout needs to come in the next few years or the Capex hit was a waste.

Carlisle: 5.36x ($970.6M ÷ $181.1M). The dividend is the safest of the four by a mile.

Where the rest of the cash goes is another matter. Carlisle spent $1.3 billion buying back its own stock in 2025, plus $181 million on dividends, against $971 million of free cash flow. The difference came from borrowing; long-term debt went from $1.9 billion to $2.9 billion during 2025. The dividend is safe. The buyback is funded by debt, and that works for a while, but not forever. So this layer includes one more question: what else is the cash paying for?

Pfizer stops here.

• 2025: 0.93x ($9,075M ÷ $9,771M)

• Trailing twelve months through June: 1.12x ($10,985M ÷ $9,785M)

Under 1.2x both ways. On top of that, Pfizer carries $63.2 billion of debt, much of it from the $31 billion it borrowed in 2023 to help pay for Seagen, and management says buybacks wait until the balance sheet comes down.

To be clear, Pfizer hasn’t cut. The third-quarter payment was its 351st consecutive quarterly dividend. But a 6.2% yield on 1.12x coverage is a dividend that needs things to go right.

And if it had made it to layer three, it would’ve failed there too. In December 2023, Pfizer called its raise “the fifteenth year of consecutive dividend increases.” It raised again in December 2024, to $0.43 a quarter. In December 2025 the board declared $0.43 again. The word “increase” is nowhere in the release. A streak of more than 15 years ended, and it happened quietly.

You just watched a raise streak of more than 15 years end with no announcement at all. The only way to catch that is to line up the December releases side by side.

We do that every week on a different company. Free, same as this.

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Layer #3: Management

Buffett wanted “honest and competent people.” We can’t interview the CEO, but we can check how management uses our money.

Two questions:

• Is the dividend growing every year? Raises tell us management believes the cash will keep coming.

• Is the share count flat or falling? A company that issues more shares every year is diluting our ownership, and the dividend bill grows right along with it.

ADP: 51 straight years of raises. The latest came in November 2025, from $1.54 a quarter to $1.70 (+10%). Dividends per share grew from $3.70 in fiscal 2021 to $6.64 in fiscal 2026, 12.4% per year. Diluted shares fell 5.8% (428.1 million to 403.3 million). Love the consistency.

Microsoft: raised the dividend 8% on September 15, from $0.91 a quarter to $0.98. Dividends per share grew from $2.24 to $3.64 over five years, 10.2% a year. Diluted shares fell 2.0%, which isn’t much for a company that spent $22.3 billion on buybacks in fiscal 2026.

Carlisle: raised 14% in August, from $1.10 a quarter to $1.25, its 50th consecutive year. Dividends per share grew from $2.13 in 2021 to $4.20 in 2025, 18.5% a year. And the share count fell 23.9%, from 53.2 million to 40.5 million.

That is shareholder-friendly with a capital S. It is also where the debt from layer two went. Carlisle passes, and we check the balance sheet again next quarter.

Layer #4: The Price

Great business, safe dividend, good management. Is it cheap enough today?

Two ways to answer it:

• The Buy Below. Every name in the Dividend School Universe carries one, a price we’ve already decided is worth paying. It is public on the Universe table at dividend-table.vercel.app.

• The hurdle. Starting yield plus dividend growth should clear 9%. This is step three of the “Don’t Chase” test, and it works on any stock, Universe or not.

ADP: $269.94 against a Buy Below of $333.81, 19.1% below. The yield is 2.5% ($6.80 ÷ $269.94). Add a 9% growth rate, under both the dividend’s five-year pace and the latest raise, and we get 11.5%. Passes both ways.

Microsoft: $501.61 against a Buy Below of $473.52, 5.9% above. The yield is 0.8% ($3.92 ÷ $501.61). The hurdle gives two different answers depending on the growth rate we pick:

• With 10.2% growth (the five-year pace): 0.8% + 10.2% = 11.0%, passes

• With 8% growth (the latest raise): 0.8% + 8% = 8.8%, fails

When one point of growth decides the answer, the answer is “not yet.” Microsoft fails layer four.

Carlisle: $314.70 against a Buy Below of still to be determined. The yield is 1.6% ($5.00 ÷ $314.70). Add the 1.6% yield to the 14% dividend growth, and you get 15.6%. Easy pass, with the buy below still to be calculated next month.

Failing layer four isn’t a no. It’s a not yet. Microsoft is a wonderful business at the wrong price. Write the Buy Below down, put it on the watchlist, and wait. Patience is a virtue.

How to Use the Filter in Your Process

Here is how our four guinea pigs came out:

Print the template and run it on the next dividend stock you’re thinking about buying. Start with a company you already own. It’s humbling, trust me.

4 Layer Dividend Stock Filter

125KB ∙ PDF file

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A few things I’ve learned doing this:

• Go in order. Layer one takes the longest, but it saves the most time, because we never value a business we don’t want to own.

• Write the numbers down. Every pass line, every result, and the date. Six months from now, we check whether anything moved.

• Re-run it every year. Carlisle and Microsoft both pass today with an asterisk, and next year we check the asterisks first.

Common Mistakes to Avoid

A few traps to avoid:

• Skipping layer one because the yield is juicy. Pfizer’s 6.2% is the whole reason people look at it.

• Treating coverage as a snapshot. Microsoft at 2.5x is fine; the trend from 3.4x is the story.

• Stopping at the dividend. Carlisle’s dividend is covered five times over; the buyback is the part funded with debt.

• Using ROIC on a bank. Use return on equity instead.

• Treating a layer four fail as a no. It means not yet.

Dying Business or Generational Opportunity: Is McDonald’s a Buy? (16 min)

My answer turned out to be neither. Three things I found:

• It’s cheap on paper. At $238, McDonald’s trades at 19.3 times earnings against a historical average of about 26. Margins are excellent, it throws off plenty of free cash flow, and the dividend is in no danger.

• Growth is the problem. Global same-store sales grew just 1.3% last quarter, below inflation. The moat is real, but I rate it thinner than most people assume. Fast-casual chains and GLP-1 drugs are both chipping at it.

• A 10-year Treasury pays about the same. Low-single-digit growth plus a dividend of about 3.2% works out to roughly a 5% return. The 10-year Treasury pays about 5.2% right now, with a lot less risk.

The price where I’d actually start buying is at 14:03. Watch on YouTube →

Disclosure: I don’t own McDonald’s. I do own Domino’s, which comes up in the video.

Final Thoughts

Buffett’s filters work for dividend-paying stocks. Follow the steps to filter for your next great idea.

Understand the business, check the cash, watch what management does with it, and only then decide what we’re willing to pay.

If you have any questions or would like me to cover something in particular, please don’t hesitate to reach out.

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

Dave

P.S. Every company in the Dividend School Universe has already been through all four layers, and we re-run the Buy Below on all thirty-five every month. Members get the Buy Below prices and the why behind them.

The Universe is growing. We are going from 30 to 35, so we added five new names.

Thirty was never a magic number. As I analyze the current Universe, I am also always looking for good companies to add. Several of these names kept appearing in my feeds, such as Carlisle and Lowe’s. Companies too good to keep ignoring and ones I would like to own when the price is right.

Some of these companies fill places we have no representation in, and others are too good to keep out.

So we are fixing that.

In today’s post, we will discuss:

• Why the Universe is growing to 35

• Addition #1: Carlisle Companies (CSL)

• Addition #2: Lowe’s (LOW)

• Additions #3 through #5

• The Five New Companies

• Earnings to Watch

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

Why the Universe is growing to 35

Each company in the Universe fits a bill. It fits one of our three strategies (Compounder, Dividend Growth or High Yield), and it passes the five filter questions we ask every quarter:

• Does free cash flow cover the dividend?

• Is guidance holding?

• Which way is the payout ratio heading?

• Are margins holding?

• Is capex crowding out the dividend?

Why add rather than reduce or remove?

Because nobody in the current 30 has done anything to lose their seat. Dropping a company that passed every filter, only to keep a round number is not ideal and potentially hinders our returns.

Buy Below prices for the new additions will come at the beginning of next month’s valuation work. Until then, we will add them to the Universe with the safety score.

Addition #1: Carlisle Companies (CSL)

Carlisle makes the roof over our heads, or at least the one over the warehouse down the street.

Its biggest business sells the membranes, insulation, and adhesives on the flat roofs of warehouses, stores, and schools. The smaller business sells waterproofs and insulates the rest of the building. Over the past few years, Carlisle sold its other businesses and became a pure building products company.

Boring is beautiful.

Safety score: 4.7 out of 5, Safe. Strategy: Dividend Growth.

• 2025 revenue: $5.02 billion

• 2025 adjusted EPS: $19.40

• 2025 free cash flow: $972.4 million

• Annual dividend: $5.00 ($1.25 a quarter)

• Yield: 1.59% at $314.70

The dividend

On August 6, Carlisle raised its dividend 14%, from $1.10 a quarter to $1.25. That was its 50th consecutive annual raise, which makes Carlisle a newly minted Dividend King.

What impresses me more than the streak is how little of the cash it uses:

• Payout on free cash flow: 18.6% ($181.1 million in dividends / $972.4 million of free cash flow)

• Payout on adjusted earnings: 21.6% ($4.20 paid in 2025 / $19.40 of adjusted EPS)

Carlisle pays us $1 of dividends for every $5 of free cash flow. Plenty of room for the next raise, and the one after that. That is an incredible free cash flow payout ratio and remarkable for an industrial. It showcases the profitability of the business.

Has 2026 changed that?

Not much. Cash flow came in lighter in the first half, so the payout over the last twelve months ticked up to 20.9%. Still well inside our comfort zone.

Why re-roofing matters

Re-roofing is the heart of the case for me. More than 70% of Carlisle’s sales come from replacing old roofs, not building new ones. When a commercial roof wears out, the owner has to replace it whether the economy is good or bad. A leaking roof doesn’t wait for interest rates to come down.

The second quarter results illustrated this. New construction fell, both commercial and residential, while re-roofing grew 3%. Revenue came in at $1,570.3 million, up 8%, and management raised full-year revenue guidance to mid-single-digit growth.

What to keep an eye on

Three things, none of them fatal:

• Margins

• Buybacks

• Competition

Margins. Raw material and freight costs are running ahead of Carlisle’s price increases, and management cut its 2026 margin guidance to flat. Part of the second quarter’s strength also came from customers buying ahead of price increases, which tends to leave a hole a quarter or two later.

Buybacks. In 2025 Carlisle bought back $1.3 billion of stock and paid $181.1 million in dividends, against $972.4 million of free cash flow. It covered the gap with cash and new debt, and cash fell from $1.1 billion to $665 million. The dividend isn’t at risk, but a company can’t spend more than it makes forever. I’ll be watching this every quarter.

Competition. Kingspan, the Irish insulation giant, is spending more than $1 billion to build a US roofing business, and analysts are flagging 2027 as the year it starts to make an impact.

Verdict

A 50-year raise streak paid out of a fifth of free cash flow, with most of the business tied to replacement demand, is exactly what the Dividend Growth bucket is for. The 1.59% yield is low, and I won’t pretend otherwise. We’re buying payment growth, not the size of it.

The stock is down 18% over the past year and sits near the bottom of its 52-week range. We’ll see where that lands against the Buy Below.

Addition #2: Lowe’s (LOW)

Everybody knows Lowe’s, the second-largest home improvement retailer in the country behind Home Depot.

Safety score: 4.5 out of 5, Safe. Strategy: Dividend Growth.

• Fiscal 2025 revenue: $86.29 billion

• Adjusted EPS, last twelve months: $12.47

• Fiscal 2025 free cash flow: $7.65 billion

• Annual dividend: $5.00 ($1.25 a quarter)

• Yield: 2.6% at $192.49

Lowe’s has raised its dividend for more than 50 straight years, another Dividend King. The latest raise, in May, was 4%, and the payout is comfortable on both measures:

• Payout on earnings: 40% ($5.00 / $12.47 of adjusted EPS)

• Payout on free cash flow: 34% ($2.636 billion in dividends / $7.651 billion of free cash flow, fiscal 2025)

So why isn’t it a 5?

The balance sheet. In 2025, Lowe’s paid $8.8 billion for FBM, a building materials distributor for professional contractors, and funded it with debt. Leverage sits at 3.0 times against a target of 2.75 times by mid-2027, and buybacks are paused.

First-half interest expense rose to $773 million from $650 million. Operating income still covers it 7.9 times ($6,103 million / $773 million). No danger, just less room.

Lowe’s also has negative shareholders’ equity, −$7.44 billion, from years of buying back more stock than it earned. That makes return on equity and debt-to-equity useless for this company, so we stick to the cash flow numbers.

Housing is the real headwind. In August, management cut full-year guidance to the low end: $92 billion in sales, flat comparable sales, and $12.25 of adjusted EPS. People aren’t moving, and people aren’t also redoing their kitchens. The economy matters for this type of investment.

Verdict for our process: a Dividend King paying 40% of earnings, added when housing is at its worst rather than its best. That’s usually the right time to add a name like this, and the stock sits near its 52-week low. This is a planting-a-tree type of investment.

That’s two of the five, graded in full and free.

Below the line, the other four:

• The company behind most of the proxy votes you’ve ever cast. Twenty straight raises, a 12% raise in August, and a regulator that proposed rewriting the rules its biggest business runs on eight days before this issue.

• A 23-year raiser whose free cash flow payout is falling this year even as its volumes shrink.

• A monthly payer the scoring tool rated 1.7 out of 5. I overrode it to 3.5, and I’ll show you exactly why.

Plus the five new rows for the Universe table and the earnings dates worth circling.

Members, keep scrolling. Everyone else, seven days free.

Unlock the other four

$369 a year or $35 a month. Thirty-day money-back guarantee either way.

Read more

The good news: I tracked down the problem, and I re-recorded the full walkthrough. It’s below.

I cover what McDonald’s sells (hint: it’s mostly rent and royalties), how the moat holds up, where growth is coming from, and whether $238 is a price I’d pay.

Grab a coffee and watch it. Hit reply and tell me if you agree with my verdict.

— Dave

Not investment advice. My own analysis.

With the 10-year Treasury closing at about 5.00% that day, and 4.94% the next. We have to ask: how much are we being paid to take risk now? The risk-free rate pays us nearly what a lot of “high-yield” stocks pay. And we don’t need to look at payout ratios, rent coverage, or debt levels to buy the Treasury.

This all makes dividend investing more challenging. When cash paid 1%, a 6% yield only needed safety. Now, that same 6% yield needs safety plus a little more to justify the extra 1% of risk.

This makes it a good month to sort the durable yields from the ones that will become our next case study.

In today’s post, we will discuss:

• 2 Minutes Safety Check

• My top 10 high yield picks for September

• Two yields that didn’t pass the check

• The full scorecard

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

2 Minute Safety Check

High-yield investments come from a wide range of businesses with different accounting rules. Each type of business will have a different flavor of coverage math. Many of them aren't apples-to-apples. We can’t compare pizza to hard-boiled eggs; it's not a fair comparison for the eggs. I mean, yuck…..

Here is the cheat sheet we’ll use across the board:

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

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

• MLPs: distributable cash flow per share dividends per share. Above 1.4 times is good.

• Mortgage REITs: net spread income against the dividend, and then tangible book value per share over the past five years.

Why not one ratio to rule them all?

Because, as I mentioned earlier, AFFO and distributable cash flow are similar but wear different hats. They approximate free cash flow for a REIT or MLP. They give us a metric we can use when earnings aren’t a good measure. For example, a REIT’s depreciation distorts paper earnings and misrepresents the REIT’s actual earning power. So we add the depreciation back, and voila AFFO.

Two rules before we start.

1. When yield looks unusually high, check whether it’s high because the payout grew or because the price collapsed. We need to investigate the second before we consider buying.

2. With Treasuries sitting near 5%, yield alone isn’t the test anymore. We need to look at total expected return, which is the starting yield plus the dividend growth rate, and compare that against the risk-free rate or Treasury.

Now, let’s get to the list.

#10 Verizon (VZ), 5.5% yield

The company’s yield has dipped a little lately because its price has rebounded.

Taking a look at the free cash flow payout ratio, here are some numbers for the first half of 2026:

• Operating cash flow: $18,419 million

• Capital expenditures: $8,210 million

• Free cash flow: $10,209 million

• Dividends paid: $5,864 million

• FCF payout ratio: 57.4%

So Verizon’s current 5.5% yield is covered 1.74 times by cash, and the company posted a 40.1% adjusted EBITDA margin; it’s higher every. Management raised second-quarter guidance to adjusted earnings of $4.99 to $5.04. Plus, free cash flow growth of 9% to 10%. The company has grown its dividend for 20-plus years.

Bottom line, the dividend is safe.

So why is this #10?

Because the stock price rallied and dropped the yield to 5.5%, which is only half a point above the risk-free rate, along with a slow dividend growth rate of 2.5%. Remember the earlier test: yield plus dividend growth? Well, Verizon adds up to 8%, against 4.94% from a safe investment.

That spread is real; why pay for the added risk for a 2.5% dividend growth rate?

Better opportunities exist.

The lesson: measure yield plus growth against the 10-year Treasury. This is why we don’t rank by yield. Verizon has rock-solid coverage and financials of almost any dividend payer, but the growth rate leaves a lot on the table. Why pay for added risk?

Trap or not: Not a trap per se, but depending on your portfolio needs, this is a poor man’s bond substitute with a higher yield. The big drag: slow dividend growth. The dividend will be paid; safety is rock solid here, but there are way better options in the market.

#9 Omega Healthcare Investors (OHI), 5.8% yield

Omega’s business model revolves around leasing out skilled nursing homes and senior housing to operators. Omega paid $0.67 a quarter for twenty-seven straight years, and then in July, raised it to $0.68. The company stated “prior to the pandemic, we enjoyed seventeen straight years of dividend growth.”

So, almost seven years of zero dividend growth, and then voila! a whole penny. Big deal.

Some financials to measure the safety:

• AFFO: $0.83 a share

• FAD (funds available for distribution): $0.78 a share

• AFFO payout on the new dividend: 82.3%

• FAD payout: 86.9%

• Full-year AFFO guidance: raised to $3.22 to $3.26

• Forward payout on the guidance midpoint: 84.0%

For those curious, FAD is AFFO with additional non-cash items stripped out. It’s a tighter version of AFFO. Notice the FAD payout is narrower than AFFO’s, which is okay because Omega’s balance sheet is conservatively leveraged at 3.3x net debt to EBITDA.

But Omega’s payout ratio only tells half the story. Who pays the rent here, and can they afford it?

• Operator rent coverage: 1.65 times EBITDAR across the portfolio

• Operators below 1.0 times coverage: 17 of them, 5.1% of rent, all current

• Largest operator: Saber, 11.4% of net operating income

• Genesis Healthcare: in Chapter 11 since July 2025, 4.6% of net operating income, and it has paid all of the contractual rent through July 2026.

Verdict: dividend safe. With an 82% payout backed by operators covering their rent 1.65 times, all is good.

The lesson: with any landlord, run the payout ratio as always, then run the tenant’s coverage. Use these two checks to ensure dividend safety. A REIT’s cushion is only as good as the rent checks coming in.

Trap or not: Not a trap, as the dividend safety is quite strong. The dividend growth leaves a lot to be desired, though. Plus, the healthcare space, while necessary, especially the properties they own, is volatile. No dividend growth here is the killer.

#8 Enbridge (ENB), 5.8% yield

Enbridge, an MLP pipeline network, has paid a growing annual dividend for 31 consecutive years. They operate pipelines stretching from Alberta to the Gulf Coast.

On September 14, Enbridge closed on a C$3.0 billion stock sale of more than 45 million shares. This equaled 2% of the company. They did this to help pay for two acquisitions, which also diluted shareholders by the above 2%. Does this dilute our dividends?

Let’s run the second numbers to get an answer:

• Distributable cash flow: C$2,948 million

• Weighted average shares: 2,184 million

• DCF per share: C$1.35

• Dividend: C$0.97

• Payout: 71.9% or 1.39 times covered

The 1.39x sits a smidge below our 1.4x we like for pipelines. If we run the six months for a better view, we see C$3.11 of DCF per share against C$1.94 of dividends, for a 62.3% payout or 1.60x coverage.

While the second quarter looks tight, the half-year is all good.

Verdict: the dividend is safe even with the dilution from the acquisitions

The lesson: always run coverage per share. A company can fund its growth by issuing stock, report record cash flow, and still give us a smaller slice of the pie.

Trap or not: Not a trap; the dividend is quite safe. There are a few warts here. First, leverage is 5.1x net debt to EBITDA, which is higher than Enbridge’s own 4.5 to 5.0 target. And they are buying more debt. They are also facing legislative issues with Line 5 in Michigan and a spill on the same line in Wisconsin. Another consideration: the dividend is paid in Canadian dollars, with 15% withheld in a taxable account. You need to hold this in the right retirement account (IRA), and account for the K-1 you will receive.

#7 W.P. Carey (WPC), 5.5% yield

In December 2023, W.P. Carey cut it’s dividend 19%, from $1.071 a quarter to $0.86. This happened right after spinning its office building into a seperate company. Many dividend investors left and haven’t come back.

But what has it done since:

• 3Q 2025: $0.910

• 4Q 2025: $0.920

• 1Q 2026: $0.930

• 2Q 2026: $0.940

They have grown the dividend by a penny every quarter, like clockwork; not great. Ten raises in a row, which looks great on paper, but digging into it gives off GE earnings-beat vibes: a penny quarter after quarter. WPC’s annual rate is $3.76, which is up 4.4% from a year ago, which is better than Verizon, Omega, or Enbridge. But that’s not a high hurdle to step over, is it?

How’s the coverage?

• AFFO: $1.34 a share

• Dividend: $0.940

• AFFO payout: 70.1%

• Full-year AFFO guidance: raised to $5.19 to $5.27

• Forward payout: 71.9%

How is the business performing? Occupancy is 98.5% across a portfolio with an average lease term of 12.2 years remaining, and 47.8% of rent is tied to inflation. So WPC is offering rent that goes up on its own.

The lesson: Sometimes a dividend cut is information, not a verdict. We need to ask: What did the dividend cut reset? Often, a company resetting itself and growing from a different base is better than the prior one.

Trap or not: On paper, this looks like a great dividend payer, with a great AFFO payout ratio and ten raises in a row. But if you dig into the actual numbers, you can see the raises are paper raises and not much to write home about. And the dividend safety is a bonus. But to me, this is a trap at the moment. It needs more time to move away from the spinoff and to reset itself.

#6 Altria (MO), 6.4% yield

Altria has been on the struggle bus for years as smoking loses its hold here in the US, and it keeps paying a growing dividend anyway. The board raised it 4.7% on August 27, to $1.11 a quarter. That’s the 61st increase in 57 years.

The first half of the year makes the dividend look dangerous, because Altria paid out more than its first-half free cash flow. That’s seasonal, and it happens most years, so the honest look is the full year:

• 2023: 74.6%

• 2024: 79.5%

• 2025: 76.7%

Three years in the seventies, and the dividend grew every year. Pricing power is what powers this. Cigarette shipments fell 3.2% last quarter and adjusted earnings per share still grew 2.8%, to $1.48. Full-year guidance is $5.61 to $5.72 a share.

A payout ratio in the seventies is only as safe as the cash flow underneath it. Altria’s cash flow grows because it raises prices faster than volumes fall. What happens the day that stops being true? The payout climbs to 100% or more while the dividend continues. But as we know, that is not sustainable.

The lesson: the free cash flow payout ratio is a snapshot, but digging deeper into what drives it for Altria pricing power. That works until it doesn’t. Always understand the business and what drives any growth. It won’t always be pricing power.

Trap or Not: we’re betting the decline stays slow and orderly. The on! brand is growing fast, but not fast enough to cover the gap in slowdown in the core business. The on! pouch brand lost 1.7 points of share of the nicotine pouch category last quarter, down to 14.4%. At the new dividend and the higher capital spending plan, the payout ratio moves toward 83% next year. Watch the shipments every quarter. For me this is a hard pass, I am not a fan of smoking.

#5: Hercules Capital (HTGC), 10.7% yield

Hercules lends to venture-backed technology and life science companies, which sounds terrifying until we read the loan book.

What’s the first number on a BDC? Not the yield. It’s the non-accrual rate, the slice of loans that have stopped paying:

• Non-accruals: under 0.5% of the portfolio at cost, 0.1% at fair value

• Net investment income: $0.50 a share

• Base dividend: $0.40, covered 1.25 times ($0.50 ÷ $0.40)

• Supplemental dividend: $0.07

• NAV per share: $12.15

The payout structure is doing something clever here, and it’s worth copying as a way to read any BDC.

Hercules pays a $0.40 base plus a $0.07 supplemental. The base is the stable part. The supplemental is the variable part. If falling rates squeeze lending income, the supplemental flexes first and the base stays protected, which is why I'd underwrite the base-only yield of 9.07% and the screens show the 10.66% total. An easy way to visualize it: the base yield is the foundation we should expect. The supplement difference is a bonus if it delivers.

The lesson: with a BDC, read the non-accrual line before the yield, then find out which part of the payout can flex. A dividend with a built-in shock absorber behaves differently in a bad year.

Trap or not: everybody knows this is a quality lender, so the stock trades at 1.45 times NAV ($17.64 ÷ $12.15). We’re paying 45% over the value of the loan book, and premiums like that compress in bad markets even when the loans keep paying.

Our September 5 issue graded eight BDCs on five checks each, and this one scored 5 out of 5.

BDC’s are still on my too-hard pile, but I am studying this company and others to get a better understanding.

#4: NNN REIT (NNN), 5.7% yield

Thirty-seven consecutive annual dividend increases, and this is the REIT that gets zero love, and nobody talks about.

NNN buys freestanding retail buildings, convenience stores, car washes, auto parts shops, and leases them on long terms where the tenant pays the taxes, insurance, and maintenance. Boring on purpose.

• AFFO: $0.90 a share

• Dividend paid in the quarter: $0.60

• AFFO payout: 66.7%

• Raised to $0.62 a quarter on July 15, the 37th straight annual increase

• Full-year AFFO guidance: raised to $3.55 to $3.59

• Forward payout: 69.5% ($2.48 ÷ $3.57)

• Occupancy: 99.1%

So why does NNN sit four spots above Omega on nearly the same yield?

A 5.7% yield at a 67% payout, against Omega’s 5.8% at 82%. Same asset class, nearly the same yield, but a 15-point difference in the payout ratio. That’s why it’s rated higher. Plus, the business model is far more stable, and they aren’t under regulatory and legal fire.

The lesson: despite asset classes, we need to determine the strength of the payout ratio on an individual company basis. Using blanket statements, like REITs under an AFFO payout of 85% are safe, can get us in trouble. We also need to understand the business model, drivers, and risks of that particular business. Not all REITs are the same.

Trap or not: this REIT carries some familiar names on its roster sheet, some for the wrong reasons. Dave & Buster’s is 3.6% of rent, and AMC Theatres is 2.4%. Leverage of 5.7 times is at the high end of where NNN runs, and dividend growth is slow, 3.3% on the last raise. This one isn't a trap, but I'm not sure about the length of the runway. With debt higher and slower dividend growth, this belongs on a watch list.

[PAYWALL]

That’s the check, free. One coverage number per asset type, seven names that pass it, and two that don’t.

What’s below the line is the part I can’t give away. Three more picks, and they’re where the yield and the safety stop trading against each other: a 7.9% payer covered 1.4 times whose entire customer list is one company, a 6.3% REIT that suspended its dividend in 2020 and now covers it 1.5 times, and my number one, a 6.5% partnership whose next scheduled raise would break its own coverage rule, which is either the catch or the whole opportunity.

Plus the third failed yield: a 14% payer whose dividend is covered right now and whose book value is down 45% since 2021.

And the recheck on August’s top three, including the one whose earnings just crossed under its dividend by a penny.

Members, keep scrolling. Everyone else, seven days free. Membership is $369 a year or $35 a month, with a 30-day money-back guarantee either way.

Show me the last three

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“Don’t chase yield” is the first thing anybody says to a new dividend investor. As advice, it does not survive contact with our own table.

The highest yielder in our Universe pays 6.8% and carries our top safety score, VERY SAFE. The next one down pays 5.8% and carries the same score. Neither one is a trap. Meanwhile, a 2.9% yielder in the same Universe has not raised its dividend in three years, and I did not notice until I went looking.

So the rule cannot be “high yield bad.”

A yield is a fraction. Fractions get big two ways, and only one of them is good news. The payment goes up, or the price goes down. Two completely different companies end up wearing the same number, and the number will not tell us which one we are holding.

That is what the test is for.

In today’s post, we will discuss:

• Why the yield by itself gets us nowhere

• Step one: does the cash cover the payment

• Step two: is the payment still moving

• Step three: does yield plus growth clear our hurdle

• Where the test breaks and what it cannot tell us

Okay, let’s dive in and build a test we can run on any high-yielder in about 10 minutes.

Why the yield by itself gets us nowhere

Yield is this year’s cash divided by today’s price. It answers one year's worth of questions that have run for decades.

Back on August 18, we said that yield tells us about profits, not price. Same idea here, one step further. A dividend we are still collecting in year ten is worth a great deal more than a dividend that gets cut in year two, and the yield quoted on the screen treats those two as identical.

The screen will not do this work for us. Three questions will, and they go in order, cheapest first:

• Does the cash cover the payment?

• Is the payment still moving?

• Does the yield plus its growth clear our hurdle?

Fail the first one, and we stop. No point valuing a dividend that is not going to be there.

One thing to get out of the way before we start, because it trips people up every time. “Cash” means something different depending on what we are holding:

• Regular companies: free cash flow

• REITs: AFFO, adjusted funds from operations

• MLPs: DCF, distributable cash flow

• BDCs: NII, net investment income

Use the wrong denominator and the whole test returns garbage. A REIT run on free cash flow looks like it is paying out 40% of nothing, because a landlord with no capital expenditures reports a free cash flow number that flatters it.

Step one: does the cash cover the payment?

Not the payout ratio. The coverage ratio.

Same arithmetic upside down, and it reads better. A 73% payout is a 1.37 times coverage, and 1.37 times tells us straight away how far cash can fall before the dividend is in trouble. Twenty-seven percent, in that case.

Here is where I draw the line, and it is a soft line:

• Above 1.5x: comfortable

• 1.2x to 1.5x: fine, watch it

• Below 1.2x: the payment is now depending on things going right

• Below 1.0x: the company is funding the dividend from somewhere other than operations

Let’s look at Enterprise Products Partners (EPD) as our guinea pig because it has one of the two highest yields on our board and makes this step look easy.

Enterprise moves natural gas liquids, crude, and petrochemicals through pipelines and terminals, mostly on long-term fee-based contracts. It is an MLP, so we use distributable cash flow, and it issues a K-1 at tax time instead of a 1099. Worth knowing before you buy one in an IRA.

The second quarter numbers:

• Distributable cash flow: $2.315 billion

• Coverage of the declared distribution: 1.9 times

• Adjusted free cash flow: $1.341 billion, up 65%

• Adjusted EBITDA: $2.829 billion, a record

Coverage of 1.9 times. Cash flow would have to fall by nearly half before the distribution came under pressure, and it went up.

Step one passed, and it was not close.

Run the same step on VICI Properties, and we get 1.37 times, using AFFO guidance of $2.45 to $2.47 against a $1.80 dividend. Comfortable, less roomy, still clear.

Two 6% yields, both covered. So far the “high yield is dangerous” rule is naught for two.

Is your dividend safe? Check any company for free:

Check if your dividend is safe here

Step two: is the payment still moving?

This is the step I got wrong in my own Universe, so we are going to spend a minute on it.

A cut almost never arrives out of nowhere. It gets announced quietly at first, and the announcement is a raise that never happens. Management stops raising long before it starts cutting, because a freeze costs them nothing and a cut costs them the shareholder base.

Which makes a freeze the single most useful signal we get, and the easiest one to miss. Nothing happens. There is no press release saying “we have decided not to raise the dividend.” The payment just shows up the same as last year, and if we are not looking at four years side by side, we will never see it.

I missed one. LVMH sits in our Universe, and I had it filed as a compounder that raises like clockwork. Then I went and looked:

• Fiscal 2022: EUR 12.00

• Fiscal 2023: EUR 13.00

• Fiscal 2024: EUR 13.00

• Fiscal 2025: EUR 13.00

One raise in four years. Frankly, I should have caught that a lot earlier than I did, and the only reason I caught it at all was writing up the Universe and putting the years in a column.

Now the part that turns a boring flat line into an actual warning. Look at what the payout ratio did across those same three flat years:

• 2023: 43%

• 2024: 52%

• 2025: 59%

The dividend did not change, and the payout ratio climbed by 16 points. That only happens one way. Earnings fell underneath it.

WARNING: This is the case that fools people. A flat dividend with rising coverage is a management team being careful. A flat dividend with a falling cushion is a management team that would like to raise and cannot, and those two look identical on a dividend history page. Always pull the ratio alongside the payment.

The 2026 interim came in at EUR 5.50, the same interim they have paid every year since 2023. Year four.

So what do we do with that?

We do not sell on a freeze. A freeze is information, not a verdict. LVMH is still a business I want to own at a price. What the freeze does is move it out of the “raises every year, do not need to check” pile and into the “check every six months” pile, which is where it should have been all along.

Step two is a directional question and takes about 90 seconds. Four years of the payment, four years of the ratio, side by side. That is the whole step.

Step three: does yield plus growth clear our hurdle?

The first two steps ask whether the dividend survives. This one asks whether we make any money owning it, and they are genuinely different questions.

The dividend discount model we ran on August 18 is the long way round. Rearranged, it gives us a shortcut that fits on a napkin:

Expected return = starting yield + dividend growth rate

That is it. Buy a 6% yield that grows 3% a year and hold it while the valuation stays put, and we are looking at 9% a year. The market can do whatever it likes in between, and over a long enough stretch this is what shows up.

So we need a hurdle. Mine is 9%. That is where I sit on a good-quality dividend payer, because it is a little above the long-run market average, and I want the premium for the predictability to still leave me ahead.

Back to Enterprise.

• Yield: 5.83%, at $38.43

• Most recent increase: 2.8%

• Yield plus growth: 8.6%

Below the hurdle.

And notice what did not happen there. Nothing broke. Coverage is 1.9x, 28 straight years of increases, distributable cash flow up, and a record EBITDA quarter. This is a good business paying a safe distribution, and it still does not clear the bar.

Because the growth stopped keeping up. A 2.8% raise on a 5.8% yield is a fundamentally different investment than the same yield growing 7%, and the yield quoted on the screen is identical in both cases.

Our Buy Below on EPD is $32.77. It trades at $38.43, so it sits 17.3% above the price where this becomes a buy for us. That is not a criticism of the company. It is the price that asks for more than the cash flow can afford to pay, and we can just wait.

Two notes before you run this on your own book.

The growth rate is the number that decides everything, and it is the one we have to defend. The 2.8% above is EPD’s most recent actual increase, not company guidance, because Enterprise has not guided to a distribution growth rate at all. When we pick a growth number, we are making a claim, and we should be able to say where it came from.

And the sensitivity warning applies twice, same as it did in August. A single point of growth swings the answer. Run it at 2%, run it at 4%, and see whether the conclusion holds across the range before committing to it.

Where the test breaks

Three things it will not do for us.

It will not catch a business that is about to change. Coverage, direction, and price are all measured on what has already happened. A tenant walking away, a regulator moving, a contract repricing- none of that shows up until it shows up.

It will not tell us anything useful about a company whose growth rate exceeds our hurdle rate. Run this on Mastercard, and the arithmetic falls apart, same as the DDM did in August. The test is built for stable payers, and it should be used on stable payers.

And it will not stop us from paying up for a good story. That is what the third step is there to argue with, and it only works if we run it before we buy, not after.

How to run it in ten minutes

The whole thing, start to finish, on any name:

• Pull the right cash number. Free cash flow, or AFFO, or DCF, or NII.

• Divide it by the dividend. Under 1.2 times, stop reading.

• Put four years of the payment in a column. Then put four years of the payout ratio next to it.

• Take the current yield, add the growth rate we are willing to defend, and compare it to our hurdle.

• Write down the growth rate we used and why. Check it in six months.

That last one is the step everybody skips, and it is the one that compounds. A number we wrote down is a number we can be wrong about on purpose, which is the only way any of this gets better.

What I would read next

On Saturday, I ran these exact three steps on VICI Properties, which had just touched a 52-week low of $25.81, while the dividend and cash flow rose with it.

Steps one and two came back clean, and I published both, free. Coverage of 1.37 times. Eight straight years of raises. The $413 million “miss” that made the headline in July turned out to be an accounting entry nobody wrote a check for.

Step three is the one members got, and it is the one that cost me something. Running the growth number honestly meant admitting our own table had been carrying VICI at a fair value I could not defend, built on a growth assumption I had been too generous with. So I cut it, in public, and showed the grid the old number and the new one both fall out of.

The verdict, the arithmetic behind the growth rate, and the new Buy Below are here:

[VICI Just Hit a 52-Week Low. Bargain or Trap?]([VICI POST URL])

Seven days free to read it. After that, it’s $369 a year or $35 a month, with a 30-day money-back guarantee either way.

Every yield-anchored pick gets these same three steps. The next one lands this month.

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

Dave

P.S. The three-step test is below as a one-page printable, no email required. Stick it next to the screen. It is the same test in the same order, and it fits on one side of a sheet of paper.

Download the 3-step high-yield test

One of the five companies on today’s list cut its dividend 55% on July 31.

I pulled up a screener alert on it dated September 10. It listed the yield at 8.2%.

That number is built from a dividend the company stopped paying in July, divided by a September price. The trailing dividend told the story it did, but the company cut the dividend, which is a story we will tell. It also broadcast that a cut was on the horizon once we dug into the financials.

That is this month’s lesson, and it runs through all five names. Every company reports trailing numbers because history is what we have to work with. The trick is to read the financials and figure out what story they're telling us. For example, a tariff refund that will not repeat. An accounting reversal. A cut that has not caught up. Same tools, same screens, five different ways to get it wrong

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

1. TELUS (TU)

TELUS is one of Canada’s three big telecom carriers. It has wireless, internet, and a couple of side businesses in health and agriculture that were supposed to be the growth story.

The company is unlike any I have covered before, and it offers us a great case study.

On July 31, TELUS cut the quarterly dividend from CAD 0.4184 to CAD 0.1875. That is a 55% cut. The multi-year dividend growth program, 34 increases since 2004, was withdrawn entirely. Free cash flow guidance for 2026 came down from CAD 2.45 billion to CAD 1.8 billion. The company also took a CAD 2.1 billion write-down on TELUS Digital, the business it had finished buying out nine months earlier.

We are not asking if this is a trap; instead, we are reading what went wrong and trying to anticipate it in the future.

What did it look like on the way down?

At USD 9.10 on the NYSE, the forward yield is 5.94% (CAD 0.75 annualized, converted).

The screener alert I mentioned at the top said 8.2%. Here is how it got there: it took the Canadian-dollar dividend and divided it by the US-dollar price. Two currencies, no conversion, and simple division math all on a company cutting its dividend.

The payout ratio gave us the clues

We could have predicted this by looking at the payout ratios.

TELUS’s payout ratio over the trailing twelve months before the cut:

• On TELUS’s own definition of free cash flow: 112% (CAD 2,601M of dividends / CAD 2,313M of free cash flow)

• On plain operating cash flow minus capex: 108% (CAD 2,601M / CAD 2,405M)

• Against the company’s own stated target of 60% to 75%

A company paying 112% of its free cash flow is not paying us out of the business. It is paying us out of something else. In TELUS’s case, two things: debt and new shares.

The share count is the scary part. Weighted average shares went from 1,525 million in the second quarter of 2025 to 1,574 million a year later. Up 3.2% in a year; that’s a lot of dilution for shareholders without any return.

Where did the dilution come from?

Well, TELUS paid a dividend it didn’t earn (funded from debt), and then sold the discounted stock to the market (dilution). All of it making next year’s dividend funding an even bigger bill.

Adam Shine at National Bank called all of this in March: 339 million extra shares since 2019, carrying CAD 567 million of additional annual dividend cost. He called for a cut of at least 30%. It came in July at 55%.

And TELUS told you. Its own disclosure put the payout at 106% of operating cash flow once DRIP dividends were counted. Above 100%, in the company’s own words, in public.

Now the dividend, going forward

So is the reset dividend safe?

The new payout policy is 45% to 60% of trailing free cash flow, down from 60% to 75%.

All of this against trailing free cash flow of CAD 2,313 million, with the reset dividend costing CAD 1,192 million or 52%. Well inside our comfort zone.

Against the company’s own revised 2026 guidance of CAD 1.8 billion, that same dividend is 66%. Still above the top of a target range they announced seven weeks ago.

Which one is right?

Both are. The company’s policy specifies trailing free cash flow and doesn't formally begin until 2027, so this isn't a contradiction. It does mean the reset dividend is only comfortably covered if free cash flow recovers, and adjusted EBITDA is guided to shrink 2% to 4% this year.

Leverage sits at 3.5 times net debt to EBITDA against a 3.0 target. Net debt to EBITDA is just the mortgage-to-income ratio of the corporate world, how many years of operating profit it would take to clear the debt. That target used to be end of 2027. But in July that moved to 2028.

This year will act as a runway, even as leverage grows from 3.4 to 3.5.

What the business is doing

The news even management can’t spin: the subscription numbers are going in the wrong direction.

• Mobile phone net adds: 82,000 in Q3 2025, 17,000 in Q2 2026

• Mobile ARPU: CAD 57.21 down to CAD 56.36

• Churn: 1.06% to 1.08%

• Internet net adds: 40,000 down to 20,000

What happened to the growth?

CEO Victor Dodig names the cause plainly: “lower immigration, which is translating into lower demand for certain core products across all carriers.” Canadian telecom grew on population growth for a decade. Now that input is gone, and credit to him for saying it out loud.

One thing for US readers before we leave. TELUS is Canadian, and Canada withholds 25% on dividends to foreign holders, reduced to 15% under the treaty if your broker has a W-8BEN on file. In an IRA, the treaty generally waives it entirely. In a taxable account, we net 5.05% before any foreign tax credit, not 5.94%.

Verdict for our process: Things went south in July, which we could have seen coming in the financials. Now the wreckage is priced in, more or less. If you buy today, you own a reset dividend covered by trailing cash flow, a levered balance sheet, and a subscriber base that has stopped growing. This case study isn't a buy signal; it's an early warning signal from the payout ratio (FCF). And to understand the business and what drives it.

For me, a pass, and the most useful case study on this list.

2. Nike (NKE)

Nike needs no introduction.

At $37.05, the stock yields 4.43%, trades at 17.6 times trailing earnings, and sits 52% below its 52-week high of $76.97. Twenty-four consecutive years of dividend increases.

At first glance, this dividend aristocrat-in-waiting has had a bad decade and looks like a bargain here. After all, it is down roughly 80% from all-time highs.

Then we open the cash flow statement.

Nike paid out more than it earned in cash

How much of the dividend did the business pay for?

Fiscal 2026 ended May 31. Here is the math, and it is not pretty:

• Operating cash flow: $2,868 million

• Less capital expenditures: $684 million

• Free cash flow: $2,184 million

• Dividends paid: $2,407 million

$2,407M / $2,184M = 110%.

Nike paid its shareholders $223 million more than the business produced in free cash. It funded the difference with balance sheet cash. And while that works for a while, it doesn’t forever.

And it gets worse when we take the tariff refund out. Fiscal 2026 earnings include a $986 million one-time benefit from recovering tariffs paid under IEEPA, after the Supreme Court ruled them unauthorized in February. That is $0.52 of the $2.10 in reported earnings per share. Of the $986 million, just over $300 million had arrived as cash by year-end. The rest sits in receivables owed by the federal government.

Strip it out:

• Underlying EPS: $1.58, not $2.10. Payout on earnings goes to 103%

• Underlying free cash flow: $1,884 million. Payout goes to 128%

Is this a one-year wobble or a trend? Three years of coverage tells us:

• FY2024: $6,617M of free cash flow against $2,169M of dividends — covered 3.05 times

• FY2025: $3,268M against $2,300M — covered 1.42 times

• FY2026: $2,184M against $2,407M — covered 0.91 times

Operating cash flow is down 61% in two years.

What the board did about it

If the coverage broke, what did the board do?

Two things, and both of them give us better insight than the earnings release did.

The November raise history:

• 2020: +12%

• 2021: +11%

• 2022: +11%

• 2023: +9%

• 2024: +8%

• 2025: +3%

And buybacks went from $2,985 million to $123 million. Down 95%, at a 12-year low share price, by a company sitting on $9 billion of cash.

Think about what that choice is telling us. Given one pool of cash, a 12-year low share price, and a 24-year streak, the board spent it on the dividend streak.

That is a board protecting a record, not funding a policy. When the flexible return gets cut 95% so the fixed one can be maintained, the fixed one has become the constraint.

Neither Elliott Hill nor the CFO said one word about the dividend on the fiscal fourth-quarter call. No analyst asked. I read the transcript twice looking.

The part that settles the valuation question

So is it cheap or not?

Nike’s forward P/E is 21.7. Its trailing P/E is 17.6.

Read that again. The market expects Nike to earn less next year than it did last year, so the forward multiple is higher than the trailing one.

A stock whose forward multiple exceeds its trailing multiple is not cheap. It is a stock whose earnings are still falling, wearing a cheap-looking trailing number. On free cash flow, which is what the valuation runs on, Nike trades at 25.2 times against a five-year average of 31.2 times — a 19% discount, not the 44% the trailing P/E advertises.

What does the business underneath look like, once the tariff benefit is out of it?

Revenue lower. Gross margin down 190 basis points to 40.8%. Greater China down 11% for the year and down 17% in the fourth quarter once we strip out the exchange rate, which is what currency-neutral means. Converse down 31%. Management guided the first quarter down low-to-mid single digits and declined to give a full-year number.

Is any of this fatal? No. We are not predicting bankruptcy.

Nike holds $9.0 billion in cash and short-term investments against $7.9 billion of debt, so it is net cash and could fund this dividend from the balance sheet for years. A cut in the next twelve months would be a choice, not a necessity.

The real near-term risk is not a cut. It is the streak.

Nike has declared its annual raise in the third week of November for six straight years. This year, Investor Day falls on November 16 and 17. A board that went from 8% to 3% while cutting buybacks 95% and watching coverage drop below 1.0 could declare $0.41 again and end a 24-year run.

Verdict for our process: the cheapest-looking number is built from a house of cards (tariffs) that won’t repeat. If you strip out the tariff-inflated numbers, you see lower revenues, lower gross margins, and higher P/E ratios. All while the market is predicting higher forward P/E ratios, telling us it believes earnings will continue to fall. Nike reports its first-quarter results on October 1, and we will have some more clues then.

For me, a trap, and a hard, hard pass. Retail remains on the too-hard pile.

That’s two graded in full, free: the payout arithmetic, the inputs that flatter each one, and the verdict.

Below the line, the other three:

• A company whose dividend takes 27% of free cash flow, leaving $13 billion of cushion, trading at under 5 times free cash flow, and which broke a 17-year raise streak anyway. The reason it broke is the whole story.

• A business down 70% from its high with a 4.17% headline yield that pays you 2.95%. The gap is not the business. It is a tax most US holders never reclaim, and in a retirement account it is permanent.

• A blue chip where the last raise was 1.3%, the buyback has been exactly zero for a full fiscal year, and the multiple has compressed 9%. Three percent yield. Quality is not the question here; price is.

Plus the scorecard, all five graded on valuation, coverage, and what the price already assumes.

Members, keep scrolling. Everyone else, seven days free.

Unlock the other three

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Domino’s is a simple business. Most people assume they make money from pizza, but that’s not quite the story. Domino’s generates royalties from 22,531 stores, most of which they don’t own. They financed those stores with $4.8 billion of debt, which the company is not on the hook for.

Today, we will discuss what this is and how much it is worth.

In today’s post, we will dig into:

1. Answering a Reader’s Question

2. The Bet

3. What Domino’s Does

4. How Domino’s Makes Money

5. The Moat and the Competition

6. The Financials

7. Is the Dividend Safe?

8. Where the Growth Comes From

9. Management and Capital Allocation

10. The Risks

11. What Domino’s is Worth

12. The Decision

Okay, let’s dive in and figure out whether 4.3 times debt to EBITDA is a problem for a pizza company heading into a shaky economy.

1. Answering a Reader’s Question

Back on August 10 we published a joint report on Domino’s with Max from MaxDividends. The stock was $347.44. My verdict was Buy, with the 2027 refinancing on the watch list, and I said I would keep adding on weakness.

Back on August 10th, Max from MaxDividends and I published a joing report covering Domino’s. At that time, Domino’s was trading at $347.44 and our verdict was Buy. One watch list item was the 2027 refinancing, and I said I would add on any weakness.

Well, guess what, weakness show up. Dominos closed Friday at around $311, 10.3% below our valuation estimate, and 32% below the 52-week high of $458. The stock fell 8.6% in four trading days this week, from $341. All with no earnings or change in guidance news.

Recently, I had a astute reader write in asking a smart question. This is my answer for him and others with the same questions.

Here is the question:

“Almost all of the metrics appear attractive, but I have some concern about the debt/EBITDA ratio as we go into what appears to be a very unstable economic environment over the next year. (Perhaps pizza is way less discretionary than other products in this sector.)”

Frankly, in August I added refinancing to the watch list and wanted to dig deeper. This is my attempt at digging deeper.

The debt is one of the big questions with this company. Today, we will give it a full treatment of whether the 4.3x net debt-to-EBITDA puts the dividend at risk. We will also answer whether, if the economy goes south, pizza is actually less discretionary than the rest of the quick-casual restaurant category.

The short version is the reader is asking the right question. Domino’s debt does not behave like debt at most other company. In part because of the business structure, but also because the company has a history of operating with higher debt levels and its part of the structure, not a bug.

Here are the current numbers (as of this writing):

• Price: $311.79

• Dividend: $1.99 a quarter, $7.96 a year

• Yield: 2.55% ($7.96 / $311.79)

• Trailing P/E: 17.7x ($311.79 / $17.64 of trailing twelve-month earnings)

• Free cash flow yield: 6.5% ($671.5 million of 2025 free cash flow / $10.31 billion market cap)

A 2.55% yield is not a screaming bargain, and there are other options out there. For Domino’s, this is the highest yield the company has offered since going public in 2013. The prior high yield was 2.10% at the beginning. Since then, the yield has ranged between 1.2% and 1.8%.

The dividend has marched higher since 2013, at a 21.1% CAGR, while the yield has fluctuated. This reflects stock-price volatility, not dividend growth.

2. The Bet

As I mentioned earlier, Domino’s business model is simple. They operate as a franchisor. Domino’s collects a percentage of every sale from its 22,000-plus stores owned by other operators. Domino’s also sells those same stores their dough, cheese, and boxes through their distribution channels.

Domino's turns $4.9 billion in revenue into $672 million of free cash flow, for an almost 14% free cash flow margin. They spend $121 million in capex to maintain operations and their distribution while paying out a third of the cash in a dividend.

Domino's has raised that dividend for 13 straight years, and I think that will continue.

The bet is this asset-light business, which carries 4.3 times leverage, can continue to carry it through any downturn. It has before, in the recent past, with 5.2 times during 2023. Right now the market is pricing Domino’s at its cheapest multiple in a decade. I believe they are confusing a slow year with a broken model.

3. What Domino’s Does

Domino’s doesn’t sell you pizza, a common misconception of the business. Instead they use franchisee’s to sell you that pizza while also selling the franchisee the cheese and dough.

Below is the company organization as it stands today”

• 22,531 stores in more than 90 markets

• 7,231 in the US, of which 186 are company-owned, and 7,045 are franchised

• 15,300 international, all franchised

• 754 independent US franchisees, the average one running nine stores

• $20.1 billion of retail sales rung up at those registers in 2025

Domino’s owns fewer than 1% of its own stores. It refranchised 77 more in the second quarter, in Virginia and Michigan, which is why the company-owned count fell from 262 to 186 in one quarter. They sold those stores, and they remain open today.

So if Domino’s doesn’t sell us pizza, what do they do all day?

They operate three business all stacked on top of one customer, their franchisees.

• The royalty business: 5.5% of every US franchise sale, and 3.0% on average from international master franchisees, for almost no cost

• The supply chain business: 27 centers in the US and Canada that make the dough and deliver the food to every store, at cost plus a margin, with half the profit shared back to stores that buy everything from Domino’s

• The advertising fund: 6.0% of US franchise sales, collected and spent on the franchisees’ behalf, which passes through the income statement at a 100% margin and zero profit

The international side runs through master franchisees, big operators who own the rights to whole countries. Jubilant FoodWorks runs India and Turkey, 2,513 stores in India alone as of June. Domino’s Pizza Group runs the UK, with 1,410 stores. Domino’s Pizza Enterprises, listed in Australia, runs Australia, Japan, France, Belgium, and eight other markets. Alsea runs Mexico and Spain. DPC Dash runs China.

Domino’s collects a royalty from each of them and otherwise stays out of the kitchen.

How big is the biggest one? From the 2025 10-K, the largest of those master franchisees runs 3,524 stores, 24% of the international system, and produced 1.4% of Domino’s consolidated revenue. Keep that number in your pocket for the risk section.

Whole-business Securitization 101

Now the debt question answered.

If we open the Domino’s financials and glance at the balance sheet. Always a prudent thing to do. You will notice they have negative equity. Total assets equaled $1.76 billion at June 14, and Total debt equaled $4.88 billion. Shareholders’ equity, our portion, is negative $3.98 billion.

That’s a scary number: negative four billion dollars. For a company worth $10 billion in market cap.

First, how is that possible, and second, why isn’t everyone freaking out?

Simple, because Domino’s doesn’t borrow money like Ford or Kraft Heinz does. It uses something called whole-business securitization and has done so since 2007.

Here is a plain-English explainer, like for a 10-year-old (my speed).

Imagine Domino’s builds a big piggy bank with two slots at the bottom, labeled “Lenders” and “Shareholders.”

Here’s how it works:

• The Lockbox: Domino’s took it’s most valuable treasures—it’s logo, secret recipes, franchise fees, , and dough supply contracts. They then locked them all up in a separate, protected safe called “special subsidiary.” Even if the main company gets in trouble, nobody on the outside can touch what is inside the safe.

• Borrowing Cash: Domino’s went to big lenders (bond investors) and said, “Please lend us billions today. In return, all the cash from pizza sales will go straight into this safe first.”

• First in Line: Every month, money from franchise fees and dough sales pours into that safe. The lenders get their cut first; their interest payments are locked in and guaranteed by those royalties.

• The Leftovers: Only after the lenders are fully paid (plus some rainy-day savings and bills) does the leftover cash get poured out of the bottom slot into Domino’s Pizza, Inc. The company’s stock we bought.

Takeaway: As a shareholder, we don’t get the first slice of pizza. Lenders eat first, and we get whatever is left.

Or think of it as a landlord who has pledged the rent from every property they own to the bank. The bank doesn’t care about the landlord’s net worth. The bank only cares that the rent keeps getting paid.

This is why the debt looks so large next to Domino’s assets. And why the company can keep carrying the debt load. The lender (bond investors) is underwriting royalties from 22,000+ stores. Those notes have carried a BBB+ (investment grade) rating from S&P. All on a company with negative equity.

Here are the terms that matter, from the 2025 10-K and the second quarter 10-Q:

• $4,766 million of fixed-rate notes across seven tranches, coupons from 2.662% to 5.217%

• A blended coupon of 3.82%, which works out to $182 million a year of interest on the notes

• A minimum debt service coverage ratio of 1.75x. Below that, cash gets trapped inside the subsidiaries and used to pay down principal instead of flowing up to us

• A leverage test: scheduled principal payments of 1% a year are suspended as long as leverage stays at or below 5.0x on the older notes and 5.5x on the 2025 notes

• The company passed both tests at June 14 and at year-end, so every dollar of principal is classified as long-term

Each tranche has what the documents call an anticipated repayment date. That is the date Domino's is expected to refinance. If it does not, the interest rate steps up and all the excess cash sweeps to the bondholders until they are paid, which is the structure's way of forcing a refinancing without calling it a default. The legal final maturity on the newest notes is 2055.

So what is the actual maturity wall?

• Fiscal 2027: $1,319 million (the 2017 and 2018 notes, at 4.118% and 4.328%)

• Fiscal 2028: $827 million (the 2021 notes, at 2.662%)

• Fiscal 2029: $648 million

• Fiscal 2030: $500 million

• After that: $1,473 million

How this bridges to the financials. For a “normal” company, debt to EBITDA tells us how many years of profit it would take to pay the lender back. In this scenario, the number gives us a more narrow definition. It tells us how close Domino’s is to the covenant that would turn off the cash-flow hose to shareholders.

At 4.3x today, the distance to the 5.0x test is close. We can also see how this plays out if the company fails the test, because it happened recently.

At the end of 2023, Domino’s reported leverage of 5.2x, and that year it repaid $55.7 million of debt, which is close to 1% of the notes plus the lease payments. In 2024, leverage fell back to 4.9x, and repayments fell to $17.6 million. Domino’s raised its dividend 10% in 2023 and 25% in 2024.

Bottom line, nothing broke.

WARNING: never use return on equity or book value to judge this company. The equity is negative, so both numbers are meaningless. NEVER. Use free cash flow and return on invested capital instead, as we do below.

Upgrade to Paid

4. How Domino’s Makes Money

Domino’s reports revenue in five segments, with different businesses. Here is 2025, from the 10-K:

• Supply chain: $2,989.5 million, 60.5% of revenue

• US franchise royalties and fees: $677.1 million

• US franchise advertising: $559.5 million (pass-through, zero profit)

• US company-owned stores: $375.2 million

• International franchise royalties and fees: $338.7 million

Total revenue: $4,940.0 million, up 5.0% from $4,706.4 million.

Why doesn't revenue tell the whole story here?

Because 60% of it is Domino’s selling cheese to its own franchisees at a 12% gross margin. Profit is the number to watch, by segment:

• US stores (royalties plus company stores): $575.3 million of segment income

• Supply chain: $320.1 million

• International franchise: $288.5 million

Notice the international franchise profits. It turned $338.7 million of revenue into $288.5 million of income. That is an 85.2% margin and all pure royalty, no trucks, no dough.

The supply chain, almost nine times the revenue, made $320.1 million, contributing a 10.7% margin.

So what drives the top line?

Two things: how many stores there are, and how much each one sells.

Domino’s calls the second one same-store sales, and it is the number we need to follow. For any restaurant or retail business it is the key KPI to watch.

• 2025 US same-store sales: +3.0%

• 2025 international same-store sales: +1.9%

• 2025 net new stores: 776 (172 US, 604 international)

• 2025 global retail sales growth: +5.4% excluding currency

Every point of US same-store sales is worth $100 million of retail sales ($9.95 billion of US retail sales x 1%). At a 5.5% royalty, that is $5.5 million of royalty revenue, plus a few million of supply chain profit on the extra dough and cheese. Call it $10 million of operating income per comp point, on a base of $954 million.

That is the thing to understand about this business. A flat year at the stores, against the 3% the company wants, is a 3% problem for Domino’s profits. And that has been the problem for the stock price. The market pays for growth and with growth stopping, well….

Here are the headline results for the second quarter, the latest:

• Revenue: $1,194.4 million, +4.3%

• Income from operations: $232.0 million, +3.1%

• Net income: $135.8 million, +3.6%

• Diluted EPS: $4.07, +6.8% (buybacks did the last three points)

• US same-store sales: +0.1%

• International same-store sales: (0.1)%

• Free cash flow, first half: $313.6 million ($352.6M operating cash flow less $39.0M capex)

Same-store sales were meh; earnings per share still grew 6.8%. That gap is the franchisor model working as designed.

5. The Moat and the Competition

Domino’s moat has three parts, and I wrote them up in August, so here they are in short form with the numbers refreshed.

• Scale in advertising: US franchisees paid $559.5 million into the national ad fund in 2025, up 9.7%. Every franchisee pays in, and one brand spends it

• The supply chain: 27 centers make and deliver the dough to every US store, at a margin that grew from 9.0% in 2023 to 10.7% in 2025, while franchisees still got half the profit back

• The order platform: more than 85% of US sales are ordered digitally, and the loyalty program has 37 million active members

Does any of that show up in returns?

It does.

Operating income after tax in 2025 was $745 million ($954.0M of operating income less taxes at 21.9%). Invested capital, using total assets less non-interest-bearing current liabilities, was $1.18 billion. That is a 63% return on invested capital ($745M / $1,181M). Any method you prefer lands above 50%, and a business earning that on its capital does not need to borrow to grow, which is why the debt could all go to buybacks instead.

So who is winning the pizza war?

Domino’s, but it hasn’t helped the stock performance lately.

• Pizza Hut: Yum! Brands agreed in June to sell its business outside China for $1.5 billion to LongRange Capital and its China business for $1.2 billion to Yum China. Yum’s CFO guided 250 US closures for the first half of 2026

• Papa John’s: North America comps fell 8.3% in the second quarter, the company ended its sale process on August 6 and suspended its dividend the same day

• Little Caesars: private, growing, and the one competitor fighting Domino’s on carryout value

Domino’s share of the three public chains’ US sales went from 38% in 2016 to 54% in 2025, per Barron’s. The number-two and number-three brands are closing stores, being sold, or both.

That is a moat.

But it is also a flat category: $49.6 billion of US pizzeria sales in 2025, down 0.3% per PMQ, which means Domino’s growth has to come from taking somebody else’s slice.

Domino’s has struggled against delivery apps.

DoorDash and Uber Eats turned every restaurant in town into a delivery competitor, and Domino’s own delivery comps were negative in both quarters this year. Management joined the apps in 2023 and 2025 instead of fighting them. Whether that was the right call is the biggest open question, and we cover it in the risks.

Upgrade to Paid

6. The Financials

Every number here answers one question: is this a high-quality business, or a levered one that looks high-quality because the leverage flatters the per-share numbers?

Revenue grew 5.1% in 2024, 5.0% in 2025, and 3.9% in the first half of 2026. Steady and slowing. Operating margin has expanded every year since 2022, to 19.3% in 2025. That is what an asset-light model looks like.

Cash generation is where Domino’s earns its grade:

• 2025 operating cash flow: $792.1 million

• 2025 capital expenditures: $120.6 million

• 2025 free cash flow: $671.5 million, up 31%

• Free cash flow conversion: 112% of net income ($671.5M / $601.7M)

Capex was 2.4% of revenue. The franchisees build the stores. Domino’s builds dough plants and software.

Now the balance sheet:

• Total debt: $4,883.6 million at June 14

• Cash: $164.8 million, plus $187.9 million of restricted cash held inside the securitization

• Net debt: $4,718.8 million

• Leverage, the company’s own measure: 4.3x, down from 4.7x a year earlier and 4.9x in the first quarter of 2025

• Interest expense, 2025: $196.0 million

• Interest coverage: 4.9x ($954.0M of operating income / $196.0M)

• EBITDA to interest: 5.6x ($1,104M of trailing adjusted EBITDA / $198M)

How to read that?

Coverage of 4.9x is fine for a normal company and comfortable for this one, because the interest is fixed. Every dollar of the $4,766 million of notes carries a fixed coupon; the only floating-rate facility is a $320 million revolver that was undrawn at year-end apart from letters of credit. If rates go up tomorrow, Domino’s interest bill does not move until a tranche comes due.

Which brings us to the one line on the balance sheet I would actually lose sleep over. The 2027 notes.

$1,319 million comes due in July 2027 at coupons of 4.118% and 4.328%. The last time Domino’s borrowed, in August 2025, it paid 4.930% for five-year money and 5.217% for seven-year money. If the 2027 refinancing prices at the seven-year rate, the extra interest is $13.7 million a year ($1,319M x 1.04 percentage points). After tax, that is $0.31 a share, on earnings of $17.64. A real cost, not a solvency event.

The 2028 refinancing hurts more. $827 million at 2.662%, the cheapest money Domino’s will ever have borrowed, rolls into whatever 2028 looks like. At 5.2%, that is $21 million a year.

So the reader’s 4.3x is real, and it will cost more to carry. Does it threaten the interest payments?

No. We are 0.7 turns of leverage away from the test that would restart principal payments, and a long way further from the coverage covenant. Neither one is a dividend cut, and both are on my watch list.

Already a paid subscriber? Keep scrolling. The dividend safety read, the fair value, and the Buy Below price are below.

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

That is the mechanism, for free. How the debt is structured, what the covenants say, and how far we are from them.

The part I cannot give away is the answer to the reader’s question. Below the line:

• The dividend stress test: how far Domino’s EBITDA could fall before the buybacks stop, before the principal payments restart, and before the cash to the dividend gets trapped, with the 2008 and 2023 numbers as the test cases

• The fair value: a reverse DCF, a price-to-free-cash-flow range, and the assumptions behind everything.

• The Buy Below price, the position size, and the two things that would change my mind between now and the October 13 earnings report

After that it’s $369 a year or $35 a month, with a 30-day money-back guarantee either way.

Unlock the Buy Below Price

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I’m just trying to understand why. No pitch. No sales link.

Reply with the number that fits best:

1 - The price

2 - I wasn’t sure what I’d actually get

3 - I’m waiting until more stocks or features are added

4 - I want to try it before I commit

5 - I already use something else.

Or just type your own reason. I read every reply personally.

That’s it. One number.

Thanks,

Dave

What is on the other side of the wall?

• The five September Best Buys, names and Buy Below prices

• The full Dividend Universe, all thirty

• Every deep dive, including August’s

• The Prompt Pack and the infographic library

• Tools, earnings updates, portfolio updates every other week

One of the five is that REIT. 7% yield, eight straight annual raises behind it, trading 17% under my Buy Below, and it raised guidance twice this year. It is still locked.

“How much of it do I actually get during the trial?”

All of it. Nothing is held back for seven days. Day one, the whole thing opens. If it does not earn its keep, cancel within the week, and nothing gets charged. You have 30 days after that to change your mind either way.

Join tonight and $299 is the price for as long as the membership runs.

Start the 7-day trial

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

Dave

P.S. What closes tonight is the $299 annual plan, which locks in for as long as the membership runs. Monthly renews at whatever the price is that month.

Doing this research yourself is completely doable. The filings are free on sec.gov. The math is arithmetic. I taught the whole four-test screen in an email a couple of weeks back and gave it away on purpose.

So what does doing it ourselves actually cost?

Say thirty companies, and say twenty minutes each per quarter to read the release, pull three lines off the cash flow statement, check the payout, and note the dividend action. That is ten hours a quarter, forty hours a year, before we have valued a single one of them.

Add the valuation work, and it is closer to eighty.

There is a second cost, and it is the expensive one. What we miss. The freeze that does not make the news, the payout ratio drifting from 60% to 85% over three quarters while nothing looks obviously wrong. I have been doing this for years, and I still found a three-year dividend freeze sitting inside my own Universe, and I found it because I was writing an issue, not because I was watching.

Here is the price against that.

• $299 for the year, which works out to $24.92 a month ($299 / 12)

• $369 is what it costs the rest of the time

• Paid monthly, the same year runs $420 ($35 x 12), so $299 is 28.8% under that

The Prompt Pack alone covers $99 of it. Ten prompts that walk through a business, its financials, and whether the dividend holds up.

Join this week and $299 stays the price for as long as the membership runs.

Seven days free before anything is charged. Thirty days after that to change your mind.

Money well spent if you ask me.

Start the 7-day trial

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

Dave

P.S. Closes tomorrow at 10 pm Eastern.

So rather than describe it, here is one. The Johnson & Johnson deep dive is unlocked. No signup, no card, nothing behind it.

This is the kind of thing that only comes up when you read.

A screener will tell us Johnson & Johnson pays out 47% of earnings and move on. Open the cash flow statement, and the dividend takes 63% of free cash flow ($12.4B of dividends / $19.7B of free cash flow). Add the $6 billion buyback sitting ahead of it in the capital priority order, and 93% of every free cash flow dollar is already spoken for.

Same company, same year. One number says plenty of room. The other says almost none.

That is not a reason to avoid JNJ, and the deep dive says so. It is the difference between a screen and an analysis.

What a screen gives us: a list.

What it does not give us: how the money gets made, what would have to break for that to stop, or whether the dividend survives a bad year. Reading gets us those, and reading takes time most of us do not have on a Saturday.

That one is out of the infographic library. There are 250 more, and they come with the membership.

One company gets the JNJ treatment every month. Twelve sections, start to finish, every number out of the filings.

So what is not unlocked? August’s deep dive, the three unnamed September Best Buys, and every Buy Below price on the board.

Through Sunday, it is $299 for the year instead of $369, locked at $299 for as long as the membership runs. Seven days free, then thirty days to change your mind.

Start the 7-day trial

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

Dave

Not three hundred, and not the sixty-nine names on the Aristocrats list. Thirty, because thirty is the number one person can genuinely follow every single month.

Why does the number matter so much?

Because “monitored” has to mean something. Every month, each of the thirty gets:

• The quarter read, if it reported

• Any dividend action, raise, freeze, or cut

• A fresh coverage check on free cash flow

• A recalculated Buy Below price

That last one is where the Best Buys come from. We re-run valuation on all thirty every month, and the five trading furthest under their Buy Below become the list. Which is why the Universe barely moves and the Best Buys change every time.

The names span sectors on purpose. September’s five run from a technology consultancy to a payroll processor to a casino landlord, with yields from 0.9% to 7%.

Why the spread?

Because we are building a portfolio here, not running a screen. Five names that all do the same thing in the same downturn is one name with extra steps.

And when something breaks, the name comes off, and I say why. Frankly, the removals teach more than the additions do, because a removal is me showing my work on something I got wrong.

So what does all that selecting actually produce?

Here is the whole Universe against the index, on five-year numbers.

• Dividend yield: 2.3% against the S&P 500’s 1.1%

• Dividend growth: 10.6% a year against 6.2%

• Revenue growth: 12.2% against 6.9%

• Operating margin: 37.0% against 13.2%

• Return on invested capital: 15.4% against 9.8%

• Earnings per share growth: 13.7% against 8.0%

Two of those matter more than the other four for anybody who plans to live on this money. Double the starting yield, and a dividend growing 71% faster (10.6% / 6.2%).

What does that combination do given some time?

Say $100,000, spread evenly across the names, and say both keep doing what they have done for the last five years.

• Year 10: the Universe pays $6,299 a year. The index pays $2,007.

• Year 20: the Universe pays $17,252 a year. The index pays $3,663.

That is yield on cost, and the math is not complicated. A 2.3% yield growing at 10.6% reaches 17.25% on the original money after twenty years (2.3% x 1.106^20). The index, starting at 1.1% and growing at 6.2%, reaches 3.66%.

Here is the same thing said another way, and it is the version that stuck with me.

The Universe reaches a 6.3% yield on cost in ten years. The S&P 500 needs about twenty-nine years to get to the same place.

Big caveat here, and this matters. Those are trailing five-year rates, not a forecast. My crystal ball is quite cloudy. Companies freeze dividends, companies cut them, and thirty names I picked myself are never going to behave like an index of five hundred. The arithmetic shows what the gap between a 2.3% starting yield and a 1.1% one is worth if the growth holds up. It is not a promise that it will.

That gap is why the Universe is thirty names instead of five hundred.

Through Sunday, it is $299 for the year, down from $369, locked at $299 for as long as the membership runs. Seven days free before anything is charged.

Start the 7-day trial

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

Dave

• Dividend Yield

• Dividend Growth

• Revenue Growth

• Operating Margin

• Return on Invested Capital

• EPS growth

It consists of 30 high-quality businesses that also pay dividends. We selected these 30 companies on a strict screening process.

Last Thursday I published the five September Best Buys.

Three of the five names sit behind the wall, along with every Buy Below price. I am not giving those away here.

So what can I show you? Everything else.

Stock 1. Compounder. 3.4% yield. 4.6 / 5, Safe. Trading 17% below my Buy Below. Twenty-one straight annual raises since 2005, and $12.6 billion of free cash flow against $4 billion of dividends paid. That is a 32% payout ($4B / $12.6B).

Stock 2. Compounder. 2.4% yield. 4.2 / 5, Safe. Trading 14% below my Buy Below. Fifty-one consecutive annual increases, which makes it a Dividend King, with number fifty-two due in November.

Stock 3. High Yield. 7% yield. 4.3 / 5, Safe. Trading 17% below my Buy Below. A REIT that has raised eight years running since its 2018 IPO, with AFFO per share up 7.8% last quarter and guidance raised twice this year.

Stock 4. High Yield. 4.1% yield. 4.6 / 5, Safe. Trading 19% below my Buy Below. Property revenue up 6.3% year over year and full-year AFFO guidance raised to $11.08 a share.

Stock 5. Dividend Growth. 0.9% yield. 4.5 / 5, Safe. Trading 24% below my Buy Below. Thirty-two consecutive annual raises on a payout of 15% of adjusted earnings, the lowest in the Universe.

Two notes on how we read that list.

AFFO is the REIT version of free cash flow. Where it turns up on stocks 3 and 4 is the number the dividend comes out of, doing the same job free cash flow does in a normal business.

And the safety score runs 0 to 5. It measures the dividend as it appears in the latest filings and forecasts nothing.

Every one of the five trades is under my Buy Below price right now. That will not hold.

Members have the names, the full write-up on each, and the exact Buy Below prices. Through Sunday, $299 and the price stays the same for as long as the membership runs. Seven days free first. Plus a 30-day-back guarantee- what do you have to lose?

Get the five names and more

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

Dave

All five trade under my Buy Below price. Yields run from 0.9% to 7%, and every one scored Safe on the dividend.

The free half of that issue is free to anybody who wants it. Two of the five names, in full, with the math.

So what is behind the wall?

The other three names, the Buy Below price on each of the five, and the full board of thirty.

One of those three is a REIT yielding 7%, with eight straight annual raises behind it, trading 17% under my Buy Below, and it raised guidance twice this year. That’s why many people opened Thursday’s issue.

And here is the part I have not said yet.

All five under my Buy Below at the same time is not the normal state of that list. Usually it is two or three. That is the reason for this week.

Through Sunday, September 13, Dividend School is $299 (around 30% off) for the year. It is $369 the rest of the time, and whoever joins this week keeps $299 for as long as the membership runs.

What we get every month:

• 5 Best Buys, with a Buy Below price on each one

• 5 Buy First stocks

• The full Dividend Universe, all thirty names, updated monthly

• A deep dive on one company, start to finish, out of the filings

• Tools, earnings updates, and a portfolio update every other week

Two things come along with it. The Dividend Analysis Prompt Pack, ten prompts that walk through a business, its financials, and whether the dividend holds. And the infographic library, 251 of them, covering every concept taught here.

Now, before anybody pays anything.

Seven days free. Everything opens on day one, nothing held back, no charge until the week is out. Plus, all of this comes with a 30-day money-back guarantee. Reply to any email, and I send the money back--no forms.

Now, what to expect from me this week.

There is an email coming every day through Sunday, and each one covers a different piece of how this works:

• Tomorrow: the numbers behind all five September names, tickers left off

• Thursday: why the Universe is thirty companies and not three hundred

• Friday: a full deep dive, start to finish, free, so anybody can see the work

• Saturday: what this research costs if we do it ourselves

• Sunday: last day

Then it is done, and we go back to normal.

If you have been meaning to but haven't gotten to it, that is who this is for.

Start my 7-day trial

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

Dave

P.S. Tomorrow I am going to show the numbers on all five September names with the tickers left off. Worth watching for.

Business development companies, or BDCs.

Most investors have never owned one. Plenty have never heard of them, and the ones who have usually file the whole group under “yield trap” and move on. That is a mistake, but so is buying the biggest yield on the list. Both mistakes come from the same place: not understanding how these things actually work.

So today we fix that.

In today’s post, we will learn:

• What a BDC Is

• How a BDC Makes Its Money

• Why the Yields Run 10% and Higher

• The Tax Bill, and Which Account Fits

• How We Score a BDC

• The Scored BDC List

Okay, let’s dive in and learn how these 10% payers actually work.

What a BDC Is

In 1980, Congress decided America’s smaller companies needed better access to capital, so it amended the Investment Company Act of 1940 and created a new vehicle to do the job. That vehicle is the business development company.

Think of a BDC as a bank without branches. It raises money from shareholders like us, borrows some more, and lends the whole pile to mid-sized private companies. The kind of business too big for the local bank and too small for the bond market: your regional trucking firm, your software company doing $100 million in revenue, your family-owned manufacturer.

The law puts real fences around the model:

• At least 70% of assets must sit in “qualifying” investments, mostly private US companies or small public ones (under $250 million in market cap).

• The BDC must offer its portfolio companies significant managerial assistance. Advice and counsel, not just a check.

• Leverage is capped by law. More on that below, because the cap is where the yield comes from.

The whole group adds up to roughly $450 billion in assets today. That is private credit, the asset class the financial press cannot stop writing about, except this version trades on an exchange where we can buy it with a ticker.

So why have most investors never heard of them?

Here is my favorite piece of trivia in this entire asset class. In 2014, the S&P and Russell indexes kicked every BDC out. The reason was an accounting rule, not performance: any fund that owns a BDC must fold the BDC’s operating expenses into its own reported expense ratio, which makes the fund look expensive even though nothing extra leaves anyone’s pocket. Index funds did not want the optics; the index providers dropped the group, and a decade later the fix is still stuck in Congress.

The result is an entire asset class your index fund owns none of. No forced buying, less analyst coverage, and yields that stay high partly because the biggest pools of money in the world are not allowed to reach for them. Kinda beautiful if you ask me.

How a BDC Makes Its Money

The engine is simple. Borrow at one rate, lend at a much higher one, keep the spread. Sound familiar? It is the same trade every bank on earth runs, minus the checking accounts.

The loans are the part worth understanding. A typical BDC loan is first-lien, senior secured, floating-rate, made to a private middle-market company. First lien means first in line if things go wrong, the same seat the bank holds on a mortgage. Floating rate means the interest the BDC collects moves with short-term rates rather than sitting fixed for ten years.

Two numbers tell us almost everything about a BDC, and both have a familiar cousin:

• Net investment income (NII). All the interest and fees collected, minus what the BDC pays for its own borrowing and management. NII is the BDC equivalent of earnings per share, and it is the number the dividend has to live inside.

• Net asset value (NAV). Portfolio value minus debt, per share. NAV is book value, plain and simple. When loans go bad, NAV is where the damage shows up.

Let’s use Ares Capital, the biggest BDC of them all, as our guinea pig. In the second quarter it earned $0.50 per share of NII and paid a $0.48 dividend, so dividend coverage was 104% ($0.50 NII / $0.48 dividend). NAV finished June at $19.35 per share. Three numbers, and we already know more about that dividend than most holders do.

One more term, because it decides everything. When a borrower stops paying, the loan goes on non-accrual, the BDC’s version of a bank’s bad-loan list. Non-accruals as a percentage of the portfolio is the single best early warning this asset class offers. A BDC can fake a lot of things. It cannot fake a borrower who quit paying.

Why the Yields Run 10% and Higher

A 10% yield from a regular company usually means the market expects a cut. So why does the same number mean something different here?

Two laws drive yield, and neither is a red flag.

Law one, the tax deal. A BDC that elects to be a regulated investment company pays no corporate tax as long as it hands at least 90% of its taxable income to shareholders every year. Same deal REITs get. Skip the distribution, and the IRS adds a 4% excise tax for anything short of 98% paid out in the calendar year. The government built these vehicles to pass money through, so they do, and the payout ratio that would terrify us at a normal company is simply the law working.

Law two, the leverage cap. The original 1980 rules capped BDCs at one dollar of debt per dollar of equity. In 2018, Congress loosened it to two dollars of debt per dollar of equity for BDCs whose boards or shareholders approve it, and most of the big ones did. Compare that to a bank running ten-to-one, and BDCs are still the sober ones at the party, but the extra turn of leverage juiced every yield in the group.

Stack it up: loans that pay far more than public bonds, up to 2x leverage, and a legal requirement to pay out nearly everything. That is how a well-run BDC yields 10% without a single alarm bell ringing.

Here is what the eight biggest names on my screen pay right now, on their regular dividends at late-August prices:

• Ares Capital (ARCC): 9.6% ($1.92 in annual dividends / $20.09 share price)

• Blue Owl Capital Corp (OBDC): 10.8%

• Blackstone Secured Lending (BXSL): 12.3%

• FS KKR Capital (FSK): 14.2%

• Main Street Capital (MAIN): 5.4% (plus supplementals that take it near 7.4%)

• Hercules Capital (HTGC): 9.1% (10.6% with supplementals)

• Golub Capital BDC (GBDC): 10.0%

• Prospect Capital (PSEC): 18.4%

Now the caveat, and I am putting it right here where it cannot be missed.

The structure explains why 10% is normal. It does not make every yield on that list safe. FSK pays 14.2% because the market has watched its NAV fall by 16.6% over the past year and priced in more pain. PSEC pays 18.4% because it has cut the dividend repeatedly and the market has stopped believing. Within one asset class, the same yield number can mean “the law working” or “the market bracing,” and the whole job is telling those two apart.

Which is exactly what the scorecard at the end of this piece does.

The Tax Bill, and Which Account Fits

This section will save some of us more money than the stock picks will. BDC dividends are taxed worse than almost any income we can buy, and where we hold them matters more than which one we pick.

Remember that a BDC’s income is mostly loan interest. When that interest passes through to us, the tax code keeps its character: it arrives as non-qualified ordinary dividends, taxed at our regular income rate. Not the nice 15-20% qualified dividend rate our Coca-Cola checks get. The rate on our paycheck.

How bad is the damage?

The arithmetic hurts. For a top-bracket investor in 2026, ordinary income is taxed at 37% plus the 3.8% net investment income tax, 40.8% all in. A 10% BDC yield keeps 5.9% after tax (10% x (1 - 0.408)). The same 10% paid as qualified dividends would keep 7.6% (10% x (1 - 0.238)). Same stock, same check, and the account choice moves our take by 1.7 points of yield per year. Compound that for a decade and it is real money.

It gets one notch worse. REIT investors currently deduct 20% of their REIT dividends under Section 199A. BDC dividends get no such deduction. The IRS rules limit that pass-through to REIT dividends specifically, so a BDC’s ordinary payout is full-freight ordinary income. The one tax perk the high-yield neighborhood enjoys, and BDCs are not invited.

So where do we hold them? The answer writes itself:

• Roth IRA: the best seat in the house. The brutal ordinary rate becomes irrelevant, and a 10% compounder in a Roth is a beautiful thing.

• Traditional IRA or 401(k): nearly as good. Everything coming out gets taxed as ordinary income anyway, so an asset already taxed at ordinary rates loses nothing by being here.

• Taxable account: last resort. The IRS takes its cut at our full income-tax rate, every single year.

Two pieces of good news before we move on. BDCs send us a standard 1099-DIV, not the K-1 partnership form that makes MLP owners cry in March. And they throw off no UBTI, the tax landmine that makes some MLPs dangerous inside retirement accounts, so an IRA can hold as much BDC as we like with zero paperwork consequences. The IRS treats routine dividends inside an IRA as exempt, full stop.

One wrinkle to file away: parts of a BDC distribution can also arrive as capital gains or as return of capital, and the 1099 sorts it out each January. If the phrase “return of capital” makes your eye twitch, good instinct. We are going much deeper on dividend tax character in the free piece landing Tuesday the 15th, Qualified vs Ordinary Dividends: The $4,000 Mistake.

How We Score a BDC

Everything above is the education. Here is the process, the same five-question shape we use on the Universe, rebuilt for this asset class.

Five checks, one point each:

• Coverage: NII of at least 100% of the regular dividend. The dividend has to live inside earnings. At 97% we are eating the seed corn; at 125% there is room for raises and mistakes.

• NAV per share is flat or rising over the past year. A fat yield paired with a shrinking NAV is us being handed our own money back with a tax bill attached. My least favorite magic trick.

• Non-accruals under 2% of the portfolio at fair value. The bad-loan list, remember. Under 2% is normal weather. Above 3%, the credit engine itself is misfiring.

• Leverage at or under 1.25x debt-to-equity. The law allows 2x. The graveyard is full of lenders who used everything the law allowed.

• A fee structure that respects us. Internal management is the gold standard because the people running the loans work for shareholders, not for a fee stream. External is fine at a 1% base fee. At 1.5% and up, we are the yield somebody else is harvesting.

Score five out of five, and we have a hold-forever candidate. Three is a watchlist. Under three, I don’t care what it yields.

I ran all five checks on all eight names above, straight from their June 30 filings. The results surprised me. Two perfect scores, and neither one is the biggest or the most famous name on the list. One of the most popular BDCs in America scored a 2. And the two biggest yields on the board sit on the two worst report cards, which is exactly how this asset class keeps score.

That is the education, free, and it is most of what anyone needs to know about the asset class.

The part I cannot give away is the grading. Eight BDCs, five checks each, forty data points pulled from the June 30 filings, and a letter grade with a verdict on every name. Two A’s, a D for one of the most famous names in private credit, and the popular favorite whose dividend is outrunning its earnings.

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