Methodology

The "Almanac Safety Score": Our Methodology for Rating Dividend Stocks

Investing isn't about finding the highest yield; it's about avoiding the next cut. We developed a proprietary 0-100 scoring system to separate the "Kings" from the "Traps." Here is exactly how it works.

🛡️ The Problem with "Aristocrats"

In January 2025, Walgreens (WBA) suspended its dividend after 47 years of increases. Investors who relied solely on "History" lost everything.

Our Almanac Safety Score was built to solve this. It quantifies the current solvency of a company, not its past glory.

💰 Payout Ratio (40%) Can they afford it?

⚖️ Balance Sheet (30%) Can they survive a recession?

📅 History (30%) Are they committed?

1. The Cash Flow Test (40% Weight)

We do not use Earnings Per Share (EPS). Earnings can be manipulated by accountants. Dividends are paid in cash, so we use Free Cash Flow (FCF).

The Golden Rule:

General Stocks: We want an FCF Payout Ratio below 60%. This leaves 40% of cash for reinvestment and debt repayment.
REITs (Real Estate): We use AFFO (Adjusted Funds From Operations). A safe limit is 90% because their cash flow is contractually secured by rent.
The Red Flag: Any company paying out >100% of its cash flow gets a score of Zero for this pillar. They are borrowing money to pay you. That is a ticking time bomb.

2. The "Bankruptcy" Test (30% Weight)

A company with a safe payout ratio can still cut its dividend if the bank calls in a loan. In 2026, with interest rates hovering near 5%, debt is the #1 killer of dividends.

The Danger Zone

Net Debt / EBITDA > 4.0x

If a company owes 4 years' worth of earnings to the bank, the dividend is at the mercy of creditors. (Walgreens was >4.5x before the cut).

The Safe Zone

Net Debt / EBITDA < 2.5x

This is "Investment Grade" territory. Companies like Johnson & Johnson operate here (0.2x leverage), meaning they have zero risk of insolvency.

3. The Score in Action (2026 Data)

Does the math work? Let's apply the Almanac Safety Score to three famous stocks using their fiscal 2026 data.

JNJ

VERY SAFE

Johnson & Johnson: The Fortress

✅ Payout: 69% of Free Cash Flow (Safe).
✅ Debt: 0.2x Net Debt/EBITDA (AAA Rated).
✅ History: 63 Consecutive Years of Growth.

Verdict: The ultimate "Sleep Well at Night" stock.

WBA

UNSAFE

Walgreens: The Aristocrat Trap

❌ Payout: Negative Free Cash Flow (Undefined).
❌ Debt: >4.5x Leverage (Distressed).
⚠️ History: 47 Years (Masked the underlying rot).

Verdict: Our model flagged this as a "Sell" long before the 2025 suspension.

MMM

SAFE

3M Company: The Reset

✅ Payout: Reset to 40% of FCF (Very Conservative).
⚠️ Debt: 2.6x Leverage (Borderline).
❌ History: Streak ended in 2024.

Verdict: The dividend cut was painful, but it saved the company. It is now investable again.

4. Bonus: The "Chowder Rule" (Total Return)

The Safety Score tells you if you should buy. The Chowder Rule tells you why you should buy. It estimates your annual return by adding Yield + Growth.

Chowder Score = Current Yield (%) + 5-Year CAGR (%)

We look for a score of 12+ for most stocks, or 8+ for slow-growth Utilities.

Example: A stock with a 3% yield growing at 9% per year = 12. This is the "Sweet Spot" for double-digit returns.

Want to see the Scores?

We have applied this exact methodology to the top 50 dividend stocks in America. Don't guess—see which companies survived our "Stress Test."

View the 2026 Dividend Kings List →

Disclaimer: The Almanac Safety Score is a proprietary metric for educational purposes. It is based on quantitative data but cannot predict all market events (e.g., fraud or lawsuits).