Educational content only, not financial advice

Everything published under Dividend School and School of Investing — including free posts, paid subscriber content, emails, videos, charts, and any other material — is for educational and informational purposes only. It reflects my personal opinions and is meant to teach investing concepts, not to tell you what to buy, sell, or hold.

Nothing here is investment, financial, legal, accounting, or tax advice. I am not a registered investment adviser, broker-dealer, or financial planner, and no content should be treated as a personalized recommendation. I don’t know your goals, income, risk tolerance, tax situation, or time horizon, so nothing I write can account for your specific circumstances.

Do your own research

Any company, security, or strategy I discuss is a starting point for your own work, not a conclusion. Before you make any investment decision, do your own research and consider speaking with a licensed financial adviser, accountant, or attorney who can review your individual situation. You are solely responsible for your own investment decisions and their outcomes.

No guarantees, and investing carries risk

All investing involves risk, including the possible loss of principal. Past performance is not a guarantee or reliable indicator of future results. Markets move, companies change, and any figures, valuations, or projections I share can be wrong or become outdated. I make no representation or warranty that any information here is accurate, complete, or current, and I’m under no obligation to update it.

Some content may include forward-looking statements — thoughts about how a business or the market might perform in the future. These are estimates and opinions, not facts, and actual results may differ materially.

Positions I may hold

I may personally own, buy, or sell any of the securities I write about, and my positions can change at any time without notice. Assume that when I discuss a company, I may have a financial interest in it. I will not always disclose specific holdings in each individual post.

Affiliate links and sponsorships

Some content may contain affiliate links or paid sponsorships. If you click a link or make a purchase, I may earn a commission or fee at no additional cost to you. Sponsored content will be identified as such. Being an affiliate or accepting sponsorship does not change my honest opinion of a product or service, but you should factor these relationships in when reading.

Paid subscriptions

A paid subscription gives you access to additional educational content and analysis. It does not create an advisory relationship, and paid content is still for educational purposes only — it is not personalized investment advice and comes with no promise of any particular result or return.

Limitation of liability

To the fullest extent permitted by law, I am not liable for any loss or damage of any kind arising from your use of, or reliance on, any content published under Dividend School or School of Investing. You use this information at your own risk.

Third-party content

References to third-party companies, data, products, or websites are provided for convenience and do not constitute an endorsement. I am not responsible for the accuracy or content of any third-party material.

That is where the mistake starts.

A low price tells you the market is nervous. It does not tell you whether the dividend is safe, whether the business is growing, or whether the moat still holds. Those answers decide whether a cheap stock is a gift or a trap.

Today we are going to run five dividend payers through the same valuation process I use, then pressure-test each one on safety, growth, moat, and risk. They span four sectors, and they range from genuinely cheap to merely fair. The tools will show you which is which.

None of these are buy recommendations. Think of them as candidates worth your homework and a live example of how to grade a cheap-looking stock before it earns a place in your portfolio.

In today’s post, we will discuss:

• The three-tool valuation process (P/FCF, DCF scenarios, reverse DCF)

• PepsiCo and Healthpeak, including how to value a REIT the right way

• Three more names behind the paywall, where the tools get more interesting

• A scorecard you can save and reuse

Okay, let’s dive in.

How to read a valuation before you trust it

I lean on three tools from Stock Simplifier, and each one answers a different question.

Price to free cash flow (trailing) asks, “Is the stock cheap versus its own history?” It plots today’s P/FCF multiple against the five-year average and colors the zones. Green is attractive, yellow is fair value, red is expensive. Simple, and it keeps you honest about what you are actually paying for a dollar of cash flow.

A discounted cash flow (DCF) asks, “What is the business worth if it grows at X?” I never trust a single DCF number. I look at a bear, base, and bull scenario, because the spread tells you how much of the value depends on optimism.

A reverse DCF flips the question: “What growth does today’s price already assume?” This one is my favorite. You solve for the growth rate baked into the current price, then ask whether the business can clear that bar.

Here is the part most lists skip.

Valuation is only half the job. A stock can screen cheap on all three tools and still be a bad idea if the dividend is stretched, the moat is cracking, or free cash flow is shrinking. So for each name below, we pair the valuation read with the dividend-safety math and the business risks. That is the whole point.

Let’s meet the candidates.

1. PepsiCo (PEP): the low bar hiding in plain sight

Pepsi needs no introduction. Lay’s, Doritos, Gatorade, Quaker, and the Pepsi brand itself, delivered through a direct-store network that stocks the shelf for you.

On valuation, the stock is cheap versus its own past.

• P/FCF (trailing): 19.9x versus a 5-year average of 32.8x (attractive zone)

• DCF base case (10% / 5% growth): $188.86, roughly 40% above the recent price near $135

• DCF bear case (5% / 0%): $126.95, about 6% below

• Reverse DCF: the price implies just 2.5% revenue growth a year for a decade

That 2.5% is the number to sit with. The market is pricing Pepsi to barely grow, and a 54-year dividend raiser trading like a no-growth business is worth a look.

Now the safety check, and here it gets more interesting.

Per PepsiCo’s FY2025 10-K (filed February 3, 2026), the company paid $7,638 million in dividends against roughly $8,200 million in free cash flow. That is a payout near 93% of free cash flow. On core earnings the payout is a more comfortable 68%, but the cash math leaves little cushion if free cash flow stalls.

The dividend itself is not in question. Pepsi has raised it for 54 straight years and lifted it 4% in February 2026 to $5.92 a share. What you are underwriting is the cash cushion behind that streak.

Growth is the soft spot. Revenue rose just 0.4% in 2024 and organic sales grew 1.7% in 2025, while a $1,993 million writedown tied largely to the Rockstar energy brand dragged GAAP earnings lower.

The risks worth weighing: GLP-1 weight-loss drugs denting snack and soda demand, tariffs pushing up commodity costs by 6 to 11 percentage points per segment, and acquisitions that keep producing impairments.

The verdict for your process: a wide-moat compounder priced for almost no growth, with a dividend that is safe on the streak but tight on cash. Worth the homework, especially if you believe Pepsi clears a 2.5% bar in its sleep.

2. Healthpeak (DOC): value a REIT the right way

Healthpeak is a healthcare REIT that owns outpatient medical buildings on hospital campuses and lab space in the top life-science markets.

Before the numbers, one correction that trips up most people.

You cannot value a REIT on standard free cash flow. Healthpeak’s reported GAAP free cash flow shows a tiny 2.3% margin, because real-estate depreciation is a massive non-cash charge that buries true cash generation. REITs solve this with two custom metrics.

• Funds from operations (FFO) adds depreciation back. Treat it as the REIT’s version of earnings, so P/FFO is the REIT’s P/E.

• Adjusted FFO (AFFO) strips out maintenance costs. Treat it as the REIT’s version of free cash flow, so P/AFFO is the REIT’s P/FCF.

Run the multiples off the per-share figures at a recent price near $21.77:

• P/FFO: 11.8x (using FFO of about $1.85 a share)

• P/AFFO: 13.3x (using AFFO near $1.64 a share)

• Reverse DCF on FFO: with 8.5% near-term growth, the price only needs 1.1% growth a year after year three

Both multiples sit at the low end of where healthcare REITs trade, and the reverse DCF shows the market expecting almost no growth past the near term.

The dividend needs its own honest look. Healthpeak pays monthly, $0.10167 a share, or $1.22 a year, a yield near 5.6%. Against 2026 FFO-as-adjusted guidance of $1.71 to $1.75 (midpoint $1.73), the payout runs in the low 70s percent, and on AFFO near $1.64 it lands around 74%. Well covered.

One thing the yield-chasers miss: this is not an unbroken grower. Healthpeak cut its dividend in 2020 (from $1.48 to $1.20 annualized) while it exited senior housing and repositioned. It moved to a monthly payout in 2025 and has held it steady since.

The moat is in the buildings. Outpatient medical space physically attached to a hospital campus keeps physician tenants in place, and retention ran near 79% in 2025. Life-science clusters in South San Francisco, Boston, and San Diego are hard to replicate.

The risks are real and current. Lab oversupply pushed same-store life-science income negative in early 2026, the stock is sensitive to interest rates, and the March 2026 Janus Living senior-housing spinoff (Healthpeak kept about 82%) changed the earnings mix.

The verdict for your process: a well-covered high-yield REIT trading cheap on the metrics that matter, with a lab-vacancy overhang you need to have a view on. The dividend cut in its history is a reminder to underwrite the coverage behind the yield.

Below the paywall, three more names and the board that ties it together:

• The cheapest, best-covered stock of the five. A Dividend Aristocrat with a 49-year raise streak that the market has priced for 0.4% annual growth. It swept all four questions on the scorecard.

• A 48-year raiser yielding over 5% where the tools disagree with the “deep value” label. The disagreement is the lesson, and it comes with 21% downside in the bear case.

• A quality compounder in disguise. A 30% free cash flow payout, 13% revenue growth, and a 15% dividend raise in April. The most cushion on the list, if the growth holds.

• The one-page scorecard grading all five on valuation, growth bar, and coverage. Save it and run your own candidates through it.

Members get this workup every month, plus the full Dividend Universe with Buy Below prices and safety scores, and a premium email every week on a predictable schedule.

$369 a year, 30-day money-back guarantee, cancel anytime.

Read more

Here’s the part most investors miss: the warning signs sat in plain sight for six quarters.

And it keeps happening. The last nine months delivered a wave of cuts, and the same signals showed up before nearly every one of them.

In today’s post, we will discuss:

• The recent wave of cuts, and what it cost shareholders

• Why dividend streaks can’t protect you

• The five warning signs that show up before a cut

• How to run a 15-minute mid-year checkup on your dividend holdings

• What this checklist can’t tell you

Okay, let’s dive in and learn how to spot a dividend cut before it hits your portfolio.

The scoreboard: nine months of cuts

Income investors have taken a beating since last fall. A sample of the damage, with the one-day stock reaction where the market got to vote:

• Alight (ALIT): dividend eliminated in February 2026, stock down 38%

• Horizon Technology Finance (HRZN): monthly payout cut 45% (from $0.11 to $0.06), stock down 23%

• Camping World (CWH): dividend paused in February 2026, stock down 17%

• Diageo (DEO): interim dividend cut 51% (from $0.405 to $0.20 per share), stock down 16%

• Baxter (BAX): quarterly dividend cut 94% (from $0.17 to $0.01) in November 2025

• FMC (FMC): quarterly dividend cut 86% (from $0.58 to $0.08) in October 2025

Alexandria Real Estate joined in December 2025, cutting its quarterly dividend 45% (from $1.32 to $0.72 per share). Different companies, different industries, same shareholder outcome: the income disappeared and the stock got repriced in a single day.

The good news? Most of these cuts telegraphed themselves quarters ahead of time. Let’s learn how to read the signals.

Why streaks can’t protect you

A dividend cut hurts you twice.

Your income drops, which is bad enough. But the market also reprices the stock, because a cut signals the business can no longer support the payout. Look at that scoreboard again: double-digit one-day declines were the norm.

The streak is the trap. Investors see 52 years of increases and assume the 53rd is automatic. Boards feel the same pressure, which is why they keep paying long after the business stops supporting it. The streak becomes a reason to ignore the numbers.

Two definitions before we go further.

The payout ratio is dividends divided by net earnings. It tells you what portion of profit goes out the door to shareholders. Above 70% deserves attention. Above 100% means the company pays out more than it earns.

The free cash flow payout ratio is dividends divided by free cash flow (operating cash flow minus capital expenditures). This one matters more, because dividends are paid with cash, not accounting earnings.

Now let’s walk through the five signs, using Leggett & Platt as our guinea pig. Every number below comes from the company’s Q1 2024 earnings release, filed as an 8-K with the SEC on April 30, 2024.

Sign 1: the dividend costs more than the company earns

This is the loudest alarm on the board.

In the first quarter of 2024, the same quarter the cut was announced, Leggett & Platt reported:

• Net earnings: $31.6 million

• Dividends paid: $61.3 million

The company paid out nearly twice what it earned. No business sustains that. The gap gets filled with cash on hand or borrowed money, and both wells run dry.

When you see a payout ratio above 100%, the question changes from “will they cut?” to “when?”

Sign 2: free cash flow can’t cover the check

Earnings can be massaged. Cash is harder to fake.

Leggett & Platt’s Q1 2024 cash flow statement showed operating cash flow of negative $6.1 million, a $103 million drop from the $96.7 million generated in Q1 2023. Add $26 million of capital expenditures on top, and free cash flow was deeply negative in the same quarter the company wrote a $61.3 million dividend check.

Think of it like a household paying the mortgage with a credit card. It works for a month or two. It does not work as a lifestyle.

One weak quarter of cash flow can be timing. The trend is what you watch. If free cash flow covers the dividend with room to spare year after year, you sleep well. If coverage keeps tightening, pay closer attention.

Do you want this checklist run on a real company every month? Do you want the filings read for you, with the math shown? Do you want it before earnings season instead of after?

Yes, I want the monthly deep dive

Sign 3: debt climbs while earnings fall

Here’s where the pressure builds quietly.

Leggett & Platt’s net debt to trailing adjusted EBITDA, straight from its own earnings releases:

• Q4 2022: 2.66x

• Q2 2023: 3.10x

• Q4 2023: 3.16x

• Q1 2024: 3.61x

Six quarters, and leverage climbed 36%. Total debt sat at $2.1 billion at March 31, 2024, with $300 million of notes maturing that November. The company also stated a long-term leverage target of 2.0x.

Read that combination out loud. Leverage rising, a debt wall approaching, and a stated target far below the current ratio. Something had to give, and the dividend was the biggest lever available. Cutting it freed up roughly $110 million a year (2024 dividend guidance dropped from $245 million to $135 million in the same release).

When management has to choose between the balance sheet and the dividend, the balance sheet wins. Every time.

The recent wave keeps proving the rule. FMC’s board said it cut the dividend “to further prioritize debt reduction” (FMC Q3 2025 earnings release, filed October 29, 2025). Baxter cut to a penny while working toward a net leverage target of roughly 3.0x by the end of 2026 through debt repayment (Baxter 2025 10-K). Camping World paused its dividend and pointed to its “focus on reducing net debt leverage” (Camping World 8-K, February 24, 2026). Three different businesses, one common thread: too much debt meeting too little cash flow.

Sign 4: sales shrink quarter after quarter

A dividend is a claim on future cash flows. Shrinking sales shrink that claim.

Leggett & Platt’s year-over-year sales growth, from the same 8-K:

• Q4 2022: (10)%

• Q1 2023: (8)%

• Q2 2023: (8)%

• Q3 2023: (9)%

• Q4 2023: (7)%

• Q1 2024: (10)%

Six straight quarters of decline, driven by weak demand in residential end markets. No single quarter looked catastrophic. The pattern was the problem.

Diageo told the same story in 2026. When the spirits giant halved its interim dividend in February, the underlying numbers explained why (Diageo interim results, filed as a 6-K on February 25, 2026):

• U.S. organic spirits net sales: down 9.3%

• Tequila net sales: down 23.1%

• Greater China net sales: down 42.3%

The board’s own words: the dividend was reduced “to accelerate the strengthening of the balance sheet and create more financial flexibility.”

A company can defend its dividend through one bad year with cost cuts and borrowing. It cannot defend it through a multi-year decline in the actual business.

Sign 5: management changes its vocabulary

This one costs you nothing but reading time, and it might be the most reliable tell of the five.

Before a cut, the language around the dividend shifts. Watch for phrases like “reviewing capital allocation priorities,” “balance sheet flexibility,” and “evaluating all options.” Leggett & Platt’s cut announcement was titled, in part, “Updates Capital Allocation Priorities.”

Walgreens ran the same play. The company cut its dividend from $0.48 to $0.25 in January 2024, then suspended it on January 30, 2025. The suspension announcement said management “continues to evaluate and refine its capital allocation policy” (Walgreens Boots Alliance 8-K, January 30, 2025). Walgreens had raised its dividend for 47 straight years before the streak ended.

The market gives you a tell too. When a stock’s yield climbs far above its own history and its peers, that’s the market pricing in a cut. A yield that looks too good to be true usually is. The price fell for a reason, and the sellers did the math before you did.

The business development company space proved this recently. Four BDCs cut between October 2025 and March 2026:

• Monroe Capital (MRCC): cut 64% across two reductions ($0.25 to $0.18 to $0.09)

• OFS Capital (OFS): cut 50% ($0.34 to $0.17)

• Horizon Technology Finance (HRZN): monthly payout cut 45% ($0.11 to $0.06)

• BlackRock TCP (TCPC): cut 32% ($0.25 to $0.17)

Every one of them sported a double-digit yield before the cut, while shrinking net investment income squeezed the cash that funds those payouts. Investors who bought the yield got the cut. And here’s the kicker: the stocks still fell hard on the announcements. A high yield priced in trouble, and the trouble arrived anyway.

Notice Monroe’s path, two cuts in three months. Walgreens followed the same script, cutting 48% in January 2024 before suspending a year later. The first cut is rarely the last.

Your July mid-year checkup

Here’s how I’d use this, and July is the perfect time. Half the year’s filings are in, and Q2 earnings are about to land.

Pull up each dividend payer you own and spend 15 minutes per company:

1. Open the latest 10-Q or 10-K on sec.gov and find the cash flow statement.

2. Compare dividends paid against net earnings. Flag anything above 70%. Above 100% is a red alert.

3. Compare dividends paid against free cash flow (operating cash flow minus capex). Same thresholds.

4. Check the debt trend. Is net debt to EBITDA rising over the last four to six quarters? Are big maturities coming due?

5. Check the revenue trend over the same stretch. One down quarter is noise. Four or more is a pattern.

6. Read the last two earnings releases and count the capital allocation language.

One flag means watch closely. Three or more flags means decide now, on your terms, before the board decides for you.

What this checklist can’t tell you

I want to be honest about the limits here.

First, it can’t catch everything. Walgreens’ suspension announcement cited litigation and debt refinancing as key cash needs. Legal liabilities of that size don’t show up cleanly in a payout ratio.

Baxter is the humbling recent example. The company cut its quarterly dividend from $0.17 to $0.01 in November 2025 with a payout ratio around 33% of adjusted earnings ($0.68 in annual dividends against $2.05 in fiscal 2025 adjusted EPS), a level this checklist would have called safe. Management simply decided that reaching its 3.0x leverage target mattered more than the payout. A safe-looking ratio measures capacity, and boards can change priorities regardless of capacity.

(The GAAP numbers told a messier story: Baxter’s fourth quarter included a $485 million goodwill impairment. Adjusted earnings hid what reported earnings revealed, which is its own lesson.)

Second, some cuts come from strength, or at least from prudence. Alexandria Real Estate cut its quarterly dividend 45% in December 2025, from $1.32 to $0.72 per share, to preserve approximately $410 million of annual liquidity while guiding 2026 FFO to $6.25 to $6.55 per share (Alexandria 8-K, December 3, 2025). The new dividend is well covered by that FFO. Painful for income investors, yes, but a different animal than a company paying out money it doesn’t have.

Third, watch your metrics by sector. For REITs like Alexandria, earnings payout ratios are nearly useless because depreciation distorts net income. Use FFO or AFFO coverage. For banks, watch regulatory capital ratios alongside the payout.

The checklist narrows your focus. It doesn’t replace reading the filings.

The checklist, ready to save

• Payout ratio above 70% of earnings? Above 100%?

• Free cash flow covering the dividend, with the trend improving or tightening?

• Net debt to EBITDA rising over four to six quarters? Big maturities ahead?

• Revenue declining for four or more straight quarters?

• Capital allocation language creeping into earnings releases?

• Yield far above the company’s own history and its peers?

The takeaway: dividend cuts announce themselves quarters in advance to anyone reading the cash flow statement, so read it before the board does the math for you.

You now have the same five-sign checklist that flagged Leggett & Platt six quarters before the cut. The newsletter does this every week: one investing concept, taught with real numbers from real filings. If that’s useful, subscribe and the next one lands in your inbox. Free, and you can leave anytime.

As always, thank you for taking the time to read today’s post, and I hope you find something of value on your investing journey.

If I can further assist, please don’t hesitate to reach out.

Take care and be safe out there,

Dave

P.S. This month's paid deep dive points this exact checklist at the next deep dive company. If you want to see the five signs working on a live stock before the market votes, that's where to look.

In today’s post, we will discuss:

• The difference between a universe and a portfolio

• The seven rules we use to filter for the best dividend stocks

• Popular dividend stocks that failed the test (some may surprise you)

• The nine companies joining the universe

• The one company leaving, and why

Okay, let’s dive in.

A universe is a promise, a portfolio is a bet

Quick refresher for newer readers.

The Dividend School universe is the full list of companies I follow, value, and track with buy-below prices. The portfolio is the subset I own and buy. A company can sit in the universe for years as a HOLD, waiting for the price to come to us.

Expanding the universe means more shopping aisles and zero obligation to buy anything.

The seven rules we use to filter for the best dividend stocks

Every name in the universe has to clear the same bar. Here’s the honest part: I applied these rules for years before I ever wrote them down.

So when I decided to expand from 22 to 30, I did the exercise properly. I laid out all 22 holdings and asked one question: what do these companies have in common? Seven rules fell out, and they’re the same seven I use to filter every new candidate today.

1: Toll-road revenue

Fifteen of the 22 earn fees on other people’s activity. Visa and Mastercard clip payment volumes. S&P Global and Moody’s charge for ratings. Domino’s and McDonald’s collect franchise royalties. VICI and Realty Income collect triple-net rent where the tenant pays the expenses.

2: High returns on capital

The compounders and dividend growers all earn well above their cost of capital, most north of a 20% return on invested capital (ROIC). The income names substitute contracted or regulated cash flows for raw ROIC.

3: Oligopoly economics

Two or three player industries with rational pricing. We own two of the three ratings agencies and all three payment networks. That’s on purpose.

4: The yield barbell

Nineteen names yield between 0.7% and 3.3% and grow their dividends fast. Three names (VICI, Realty Income, Brookfield Asset Management) anchor the income side. Even the anchors are contract-secured. Nothing in the universe is owned for yield alone.

5: Safety before yield

Twenty of 22 carry a SAFE or VERY SAFE score. The safety score is a gate, never a tiebreaker.

6: A buy-below price on everything

Quality is never bought at any price. Moody’s, Microsoft, and Fastenal have all sat in the HOLD penalty box for trading well above their buy-below marks.

7: No price-takers

Zero energy producers, zero materials, zero classic consumer staples. If a company’s revenue depends on a price it doesn’t set, it doesn’t get in.

Write your rules down. It’s the cheapest portfolio insurance you’ll ever buy.

The stress test: popular names that failed

Before adding anything, I ran the names other dividend writers love through the seven rules. Some heavyweights didn’t make it.

Chevron (CVX) & Exxon (XOM) ✕

Commodity price-takers. Great income stocks for someone else’s framework. They fail Rules 1, 2, 3, and 7 by design.

Merck (MRK) ✕

Keytruda drives roughly 40% of pharma revenue and loses US exclusivity in late 2028. A single-product cliff is the opposite of a toll road.

AbbVie (ABBV) ✕

A fine company trading above the average analyst target after a big run, with dividend growth slowing toward 6%. Fails the valuation gate.

Texas Instruments (TXN) ✕

A 22-year raise streak, but the fab construction cycle has pushed the payout above free cash flow. Wrong moment, worth revisiting.

Becton Dickinson (BDX) ✕

54 straight years of increases and a 7.6% ROIC. Longevity without economics.

That last one stung a little. A Dividend King failed my test.

The lesson: a long dividend streak tells you about the past. Returns on capital tell you about the future.

The framework is free. The nine names, their buy-below prices, the one I'm selling, and the risk I'm taking on are for paid subscribers. See you on the other side.

Read more

In today’s post, we will discuss:

- Why high yield and dividend growth rarely show up together

- The one number that separates a safe 7% yield from a trap

- Three stocks yielding 7%+ right now, each with a different structure and a different risk

- How to size these in your own portfolio

Okay, let’s dive in.

Why 7% yields are usually a red flag

All good businesses face the same choice with their cash: reinvest it for growth or hand it to shareholders.

A company yielding 7% is handing most of it back. That usually means the market expects little growth, or worse, it expects a dividend cut and has already marked the stock down. The yield looks juicy because the price collapsed, and the price collapsed for a reason.

So how do we tell the difference between a gift and a trap?

Coverage.

Dividend coverage measures how much cash a company generates against what it pays out. A company producing $1.30 in cash for every $1.00 of dividends has a 1.3x coverage ratio. That 30% cushion absorbs a bad quarter without forcing a cut.

One wrinkle before we look at the stocks. Each of our three companies uses a different structure, and each structure has its own coverage metric:

- Master limited partnerships (MLPs): distributable cash flow (DCF) against distributions

- Business development companies (BDCs): net investment income (NII) against dividends

- Regular corporations: free cash flow against dividends

Get the metric right for the structure and the analysis gets much easier. Let’s look at our three guinea pigs.

Stock 1: MPLX (MPLX), the growth machine

MPLX is the midstream partnership spun out of Marathon Petroleum. It owns pipelines, processing plants, and storage assets that collect fees whether oil is $50 or $90. Think of it as a toll road for energy.

Here’s the scorecard from MPLX’s first-quarter 2026 earnings release, filed as an 8-K on sec.gov:

- Distributable cash flow: $1,408 million

- Adjusted EBITDA: $1,729 million

- Distribution coverage: 1.3x

- Leverage ratio: 3.7x

- Quarterly distribution: $1.0765 per unit

At recent prices, that distribution works out to a yield of around 7.3%.

Now for the part that earns MPLX the “growth” label. The current $1.0765 distribution reflects a 12.5% increase announced in late 2025, and management has stated its intention to keep growing the payout at a similar clip through 2027, backed by new Permian processing plants coming online.

A 7.3% yield growing 12.5% a year is rare air. If management delivers, your yield on cost passes 9% within two years.

The catch: MPLX issues a K-1 tax form, which adds paperwork at tax time compared with a standard 1099. MLPs also generally don’t belong in IRAs. Know that going in.

Do you want to know which 7% yields I'd actually buy? Do you want the sizing, and the coverage math behind it? Do you want that every single week? Upgrade to paid.

Yes, send me the weekly deep dive

Stock 2: Main Street Capital (MAIN), the monthly payer

Main Street Capital is a BDC. It lends to and invests in lower middle market companies, the kind too small for Wall Street but too big for the local bank. BDCs must pay out at least 90% of taxable income to shareholders, which is why their yields run high.

Main Street is the rare BDC I’d call high quality. It manages its own portfolio in-house, with no external manager collecting fees, and it has never reduced its regular monthly dividend since its 2007 IPO.

The numbers from Main Street’s first-quarter 2026 earnings release, filed as an 8-K on sec.gov:

- Distributable net investment income: $1.00 per share

- Net asset value: $33.46 per share

- Regular monthly dividends: $0.26 per share (up 4.0% from a year earlier)

- Supplemental dividend paid in Q1: $0.30 per share

- Total dividends paid in Q1 2026: $1.08 per share

Here’s where I want you to slow down and read carefully.

Main Street’s regular monthly dividends alone yield roughly 5.6% at recent prices. The supplemental dividends push the total past 7%, and by the company’s own math, total recent declarations represented an annualized yield of 7.9% as of early May 2026.

The regulars are covered comfortably. Quarterly regular dividends of $0.78 against DNII of $1.00 per share is about 1.28x coverage. The supplementals are the variable piece. They depend on portfolio performance, and management can dial them down without technically cutting anything.

So the honest framing: you’re buying a very safe 5.6% with a well-supported bonus that has been showing up quarter after quarter. That distinction matters when you’re counting on the income.

Stock 3: Pfizer (PFE), the prove-it pick

Every high-yield list needs its controversy. Here’s ours.

Pfizer yields roughly 7.1% as of early July 2026. That yield exists because the stock has been left for dead: COVID revenue evaporated, patent expirations loom, and investors want nothing to do with it.

The bear case shows up right in the cash flow statement. In fiscal 2025, Pfizer paid $9.77 billion in dividends while generating $9.08 billion in free cash flow. The company paid out roughly $700 million more than it produced. First-quarter 2026 told a similar story: $2.2 billion in free cash flow against $2.4 billion in dividends paid.

Why the 15-year streak won’t save it

Pfizer has raised its dividend for 15 straight years, and that streak fools a lot of investors into assuming safety.

The payout ratios tell the real story. In 2021, the dividend consumed just 29% of free cash flow. By 2023 that figure hit 193%, and in 2025 it still sat at 108%, with the earnings payout at 126%. When a company pays out more than it earns and more than it generates in cash, the difference comes from the balance sheet: debt, asset sales, or cash reserves. A dividend funded that way survives on management’s willingness to defend it, and willingness has a shelf life.

The yield itself is the second warning.

Pfizer’s yield averaged 4.9% over the past five years, and the dividend grew only 2.5% a year over that stretch, from $1.52 per share in 2020 to $1.72 in 2025. The payout never sprinted to 7.15%. The stock price fell to meet it. Pair that with a return on invested capital near 4%, and the yield starts looking less like a gift and more like the market’s estimate of the risk. This is exactly why the coverage test comes before the yield in our process, every single time.

Pfizer’s growth potential lives in the share price more than the payout. You’re collecting 7.1% while you wait to find out if the turnaround works. That’s a fundamentally different bet than MPLX or Main Street.

How to use this in your investing process

When any stock yielding 7%+ crosses your screen, run this sequence before you buy:

1. Identify the structure first. MLP, BDC, REIT, or corporation. This tells you which coverage metric to pull and what tax form you’ll receive.

2. Calculate coverage with the right metric. Anything below 1.2x for an MLP or BDC deserves skepticism. For a corporation, free cash flow below the dividend is a flashing yellow light, as we saw with Pfizer.

3. Check the trend. One good quarter of coverage means little. Pull the last eight quarters from the filings on sec.gov.

4. Check the balance sheet. MPLX’s 3.7x leverage is manageable for a pipeline business with fee-based contracts. The same number at a cyclical company would scare me.

5. Size accordingly. The safer the coverage, the larger the position can be. My rough guide: a covered, growing payer like MPLX can be a full position. A turnaround like Pfizer gets 1%, at most.

Common mistakes with high yielders

The biggest mistake is buying yield without understanding where it comes from. A 10% yield with 0.9x coverage will cost you more in price decline than it ever pays in income.

The second mistake is treating supplemental dividends as guaranteed. Main Street’s supplementals have been steady, but they’re structurally optional. Build your income plan on the regulars and treat the rest as a bonus.

The third one catches even experienced investors: taxes. MLP distributions come with K-1s and don’t belong in retirement accounts. BDC dividends are mostly taxed as ordinary income, so they fit best inside an IRA or 401(k). The same yield can produce very different after-tax income depending on where you hold it.

And a limitation worth naming: coverage ratios tell you about today. They can’t tell you whether Pfizer’s pipeline delivers or whether energy volumes hold up in a recession. Coverage buys the company time to work through problems. It doesn’t erase them.

The takeaway: a 7% yield is only as good as the cash flow behind it, so check the coverage before you fall in love with the income.

As always, thanks for taking the time to read this post, and I hope you find something of value in your investing journey.

If I can further assist, please don’t hesitate to reach out.

Until next time, take care and be safe,

Dave

P.S. - You just ran the coverage test on MPLX, Main Street, and Pfizer. Paid subscribers get this every week: a full analysis of one dividend stock, the verdict, the position sizing, and the coverage math shown step by step. If today's lesson was useful, that's what the paid tier is.

---

*Data sources: MPLX Q1 2026 earnings release (8-K, sec.gov, May 2026); Main Street Capital Q1 2026 earnings release (8-K, sec.gov, May 2026); Pfizer Q1 2026 earnings release (May 2026) and fiscal 2025 cash flow data. Yields as of early July 2026 market prices.*

Five companies I would buy at today’s prices. Each one comes with a Buy Below number so you know what to pay, a Dividend Safety Score from my model so you know how safe the payout is, and a short watch-list of what would confirm the thesis or break it.

Here is the shape of this month’s list.

Three are compounders, the kind of high-quality business I want to own for a decade, all trading below what they are worth right now.

One is a utility about to become the largest regulated power company in the world, buying its way straight into the data-center boom.

One is a luxury empire marked down because shoppers in China paused, with brands that are not going anywhere.

One is a financial-data near-monopoly trading at its cheapest earnings multiple in a decade.

One is the income anchor. A landlord you have heard of, paying a yield north of 6%, with rent locked in for the next 40 years.

One is a dividend-growth machine. A small yield today, compounding near 20% a year, in a business that quietly taxes the entire index-fund industry.

Every name gets the full treatment: the thesis, the dividend-safety breakdown, the reverse-DCF valuation with a Buy Below price, the risks, and the 5 and 3 green and red flags to watch each quarter.

How I score the safety

Each pick carries a Dividend Safety Score from 0 to 100. It weighs payout coverage on both earnings and free cash flow, the balance sheet, the quality of the cash flow, and how the dividend behaved in past recessions. One hard rule sits on top: if a company’s most recent free cash flow is negative, the score is capped, because a dividend paid out of debt is not a safe dividend.

This month’s five range from 70 to 85, all in Safe or Very Safe territory.

The rest is for members

So which five, at what prices, and how safe is each one? You just saw the shape of the list: three compounders, an income anchor, and a dividend-growth machine, each scored and priced. The names, the Buy Below levels, and the full analysis are below.

If you want the list every month, with the math shown and a price to buy under on every name, this is the whole reason Dividend School exists. Join us and read the rest.

Read more

The short answer: Union Pacific’s (UNP) dividend is safe, covered at 46% of earnings and 59% of free cash flow, but at $267 against our $224 buy-below the stock is a hold, and we would wait before adding.

Union Pacific is one of the 20 companies in our Dividend Universe, and it will stay there. It also won’t be anywhere near our Best Buys Now list on July 5th. Both of those things are true at once, and the gap between them is the most useful lesson in this piece.

1. The 127-year dividend and the biggest deal in railroad history

Union Pacific has paid a dividend for 127 consecutive years.

Sit with that number. The company mailed checks to shareholders through two world wars, the Great Depression, the stagflation of the 1970s, and the financial crisis. Almost nothing in American business has that kind of staying power.

And right now, this 160-year-old railroad is attempting the most audacious move of its modern life: buying Norfolk Southern to create America’s first true transcontinental railroad. The regulator just hit pause on the review.

So here’s the question this deep dive answers: when a wonderful, universe-quality business takes on the biggest deal in its industry’s history at a price above what we’d pay, what does a disciplined dividend investor actually do?

2. The bet

Union Pacific (UNP) owns an irreplaceable rail network across the western United States, and the bet is duopoly economics: only two railroads serve the West, pricing rises faster than inflation, and an improving operating ratio turns 3% revenue growth into high single digit earnings growth, year after year.

The dividend rides on top of that machine, covered roughly twice over by earnings.

The Norfolk Southern merger is the wild card, with the potential to extend the network coast to coast or to consume management’s attention and the balance sheet for years.

3. What the company does

Union Pacific moves heavy things long distances, cheaper than anyone else can.

The railroad operates in 23 western states per the Q1 2026 earnings release, connecting ports on the West Coast and Gulf to the middle of the country, with gateways to Mexico. Grain from Nebraska, chemicals from the Gulf, cars from Mexico, containers from the Port of Los Angeles. If it’s bulky and it’s west of the Mississippi, there’s a fair chance it rides UP rail.

Think of the network as a toll road that took 160 years to build and could never be built again. The land assembly alone makes a new transcontinental railroad impossible. That’s the asset you own a slice of.

One stat explains why shippers choose rail: a train moves a ton of freight three to four times farther per gallon than a truck. For heavy, non-urgent freight, rail wins on cost, and shippers have two choices in the West: Union Pacific or BNSF.

4. How they make money

UNP charges per carload, and it reports freight revenue in three buckets. From the Q1 2026 earnings release:

• Bulk (grain, fertilizer, coal, food): $2.0 billion, up 10%

• Industrial (chemicals, metals, forest products, energy): $2.2 billion, up 5%

• Premium (intermodal containers and automotive): $1.7 billion, down 5%

Total Q1 freight revenue came to $5.9 billion, up 4%, on 1% fewer carloads. Read that again: fewer cars, more revenue. Average revenue per car rose 4% to $2,829. That’s pricing power, the kind that shows up quarter after quarter when your customers have one alternative.

The full-year 2025 scoreboard, from the January 27, 2026 earnings release:

• Operating revenue: $24.5 billion, up 1%

• Net income: $7.1 billion, up 6%

• Diluted EPS: $11.98, up 8% (versus $11.09 in 2024)

• Cash from operations: $9.3 billion

And Q1 2026 set records: best-ever first quarter operating revenue ($6.2 billion), operating income, net income ($1.7 billion), and EPS of $2.87, with adjusted EPS of $2.93 up 9%.

A railroad posting record everything while carloads shrink is a business earning its profits from efficiency and price, and that’s the design.

This is the point where the paywall drops in a regular Dividend School Pro deep dive. Everything below, the dividend math, the merger risk, the valuation, and the verdict, is what subscribers get every month.

Upgrade to Paid

5. Moat and competition

This is one of the widest moats in our universe, and it comes from a simple fact: nobody can build another one.

Western rail is a duopoly. Union Pacific and BNSF (owned by Berkshire Hathaway) split the territory, and for many routes and commodities a shipper has exactly one practical rail option. Trucks compete at the margin for shorter, lighter hauls, but for coal, grain, and chemicals moving 1,500 miles, rail has no substitute.

The barriers stack on top of each other. The rights of way were assembled in the 1800s, partly by federal land grant. Regulation (the Surface Transportation Board) restricts entry and exit. And the cost advantage compounds with scale: longer trains, fewer employees per ton-mile, better fuel efficiency.

The numbers back the story. Q1 2026 workforce productivity hit 1,163 car miles per employee, up 7%, with average headcount down 5%, per the earnings release. Train length, terminal dwell, and locomotive productivity all set records. Management states the railroad earns an industry-leading operating ratio and return on invested capital, and the 60% number supports the claim.

The honest caveat: the same regulator that protects the duopoly also caps what UNP can extract from it. That tension is permanent, and it’s about to matter more than usual.

6. Financials

A railroad’s quality shows up in three places: the operating ratio, the cash conversion, and the balance sheet.

The operating ratio is operating expenses as a percent of revenue, and lower is better. Q1 2026 came in at 60.5% reported and 59.9% adjusted, an 80 basis point improvement per the earnings release. Getting under 60% puts UP at the front of the North American industry.

Cash conversion is the part beginners miss with railroads, so let’s do the math in the open. For full-year 2025:

• Cash from operations: $9.3 billion

• Capital investments: $3.8 billion

• Free cash flow (our definition: operating cash flow minus capital spending): roughly $5.5 billion

Railroads eat capital. Track, locomotives, and bridges consume 15% of revenue every single year, and that spending never stops. Even after that burden, UP converts about 22 cents of every revenue dollar into free cash. That’s what 160 years of sunk infrastructure earns you.

The balance sheet, from the Q1 2026 release:

• Total debt: $30.7 billion, down from $31.8 billion at year-end

• Adjusted debt to adjusted EBITDA: 2.5x, improved from 2.7x

• Q1 debt repaid: $1.2 billion

Notice the direction. Debt is going down, fast, and we’ll get to why in section 9.

7. Dividend deep dive

The streak: Union Pacific has paid dividends for 127 consecutive years and has raised the payout for roughly two decades straight.

The current numbers:

• Quarterly dividend: $1.38 per share ($5.52 annualized), declared for both Q1 and Q2 2026

• Most recent raise: 3%, from $1.34

• Yield at a $267 price: about 2.1%

• Dividends paid per share in 2025: $5.44, up 3% from 2024

Now coverage, both ways.

On earnings: $5.52 annualized against $11.98 of 2025 EPS is a 46% payout ratio. On free cash flow: roughly $3.25 billion of dividends paid in 2025 against $5.5 billion of free cash flow is a 59% payout. Both sit in the safe zone with room for raises even in a recession year.

This is what coverage is supposed to look like. Hold it next to the Texas Instruments piece we published alongside this one and the contrast teaches the whole lesson: TXN pays out 116% of free cash flow, UNP pays out 59%.

One yellow flag, and it’s an honest one: the raise pace has slowed to 3%, beneath the company’s longer-run pace (dividend growth averaged high single digits over the past decade). Management is conserving cash for the merger. The 2026 outlook in the Q1 release still commits, in writing, to “consistent annual dividend increases.”

Our dividend safety read: Safe, and arguably Very Safe on the numbers alone. The only reason we grade it A- and watch the file is the merger, because a deal this size reshuffles every capital allocation priority around it.

8. Growth prospects

A railroad can’t grow its track, so growth comes from four smaller levers pulling together.

Pricing above inflation is lever one, and the Q1 release confirms it: core pricing gains drove revenue growth, and management’s stated outlook is “pricing dollars in excess of inflation dollars.” Lever two is efficiency, the march from a 60% operating ratio toward the mid-50s, where every basis point drops straight to operating income. Lever three is volume mix, with grain, coal exports, and Mexico trade running strong (bulk revenue up 10% in Q1) while intermodal stays soft. Lever four is the buyback, currently paused, which historically retired 1 to 2% of shares each year.

Management’s stated targets, affirmed in the Q1 2026 release: mid-single-digit EPS growth in 2026, on track to a three-year EPS CAGR of high single to low double digits through 2027.

Then there’s the merger. A combined UP and Norfolk Southern would be the first single-line transcontinental railroad in American history, eliminating the Chicago interchange where freight sits for days. The efficiency prize is real. So is the price tag, the integration risk, and the regulatory gauntlet. We treat the merger as a free option: zero value in our numbers, with the risks counted separately in section 10.

For the dividend, the arithmetic is friendly either way: a 46% earnings payout growing with mid-single-digit EPS supports 5%+ dividend growth once the merger resolves.

9. Management and capital allocation

CEO Jim Vena is an operator’s operator, a Hunter Harrison disciple who took the job in 2023 and has delivered record operating metrics nearly every quarter since. The Q1 safety and productivity numbers (terminal dwell down 11%, freight car velocity up 9%) are his fingerprints.

The capital allocation picture changed completely with the merger, and the Q1 2026 cash flow statement shows it plainly:

• Share repurchases, Q1 2026: zero (versus $1.7 billion a year earlier)

• Debt repaid, Q1 2026: $1.2 billion

• Dividends paid, Q1 2026: $821 million, up from $804 million

Buybacks stopped. Debt paydown accelerated. The dividend kept growing. That’s the standard playbook for financing a mega-deal while defending a credit rating. The priority order (dividend protected, buyback sacrificed) is what income investors want to see.

The watch item: UP will issue a large slug of new shares to pay for Norfolk Southern. Every share issued dilutes your claim on the dividend stream, and the deal math has to earn that back through cost savings and new traffic. That’s a multi-year show-me story.

10. Risks

Ranked by what matters most.

The merger is risk one, two, and three. The Surface Transportation Board found the original application incomplete in January 2026, accepted a revised application on May 28, 2026, but is holding proceedings in abeyance with supplemental information due July 27, 2026. Translation: the regulator has questions about competition, shipper access, and service that UP hasn’t answered to its satisfaction. The range of outcomes runs from approval with painful conditions, to years of limbo, to outright rejection after enormous sunk costs. UP also inherits exposure to Norfolk Southern’s Eastern Ohio derailment liabilities if the deal closes, per the risk factors in UP’s own Q1 2026 release.

Risk four is the freight economy. Management’s own outlook calls the economic forecast muted. Intermodal carloads fell 9% in Q1, and automotive fell 6%. A consumer recession hits the Premium segment directly.

Risk five is coal’s long goodbye. Coal and renewables revenue jumped 17% in Q1 on export strength, but the decade-long trajectory of domestic coal is down, and it remains a meaningful bulk commodity.

Risk six covers the permanent ones: derailments, labor relations, and a regulator that can turn hostile, especially with a merger pending.

The bear case in one line: you pay 22 times earnings for a slow-growth railroad that spends the next three years distracted, diluted, and arguing with its regulator.

11. Valuation: a reverse DCF

A regular discounted cash flow (DCF) guesses at growth and produces a price. A reverse DCF starts from the price and solves for the growth the market is already paying for. Then you judge whether that growth is believable. (We walk through the same method in the Texas Instruments piece published earlier.)

Our inputs: an 8.2% discount rate (UNP’s weighted average cost of capital), a 4.5% terminal growth rate (anchored to the current 10-year Treasury yield), and a 10-year growth stage.

The 10-year treasury acts as our terminal rate for a simple reason, we can’t reliably “guess” at a rate longer than 10 years. And it can act as a proxy for our minimum return to best.

At $267 per share on 593.6 million diluted shares, the market values Union Pacific at near $158 billion.

Run the math on 2025’s $5.5 billion of free cash flow, and here’s what the price assumes:

• 4.7% annual FCF growth for the next decade

That’s a sane number, and that’s the problem. It’s higher than the company’s past performance, and we haven’t factored in the potential merger.

Here’s the historical FCF ranges:

• 3-year: 1.88%

• 5-year: 0.22%

• 10-year: 4.03%

Management targets mid-single-digit EPS growth for 2026 and high single digits through 2027, so today’s price assumes the plan works, hands you the merger for free, and leaves nothing over for disappointment.

Now the same math at our buy-below:

• At $224: 2.6% implied growth, below inflation

Pay $224, and you own a railroad priced to grow slower than the economy, with every basis point of pricing power, efficiency gain, and merger upside as your margin of safety.

One honest caveat: the 4.5% terminal rate is generous, which flattens the hurdle. These implied growth rates are floors. Another caveat: any company growing slower than GDP or 10-year Treasury rates doesn’t earn our money.

There’s slow, and there’s too slow.

For context, $267 is also 22 times trailing EPS of $12.15 (2025’s $11.98, minus Q1 2025’s $2.70, plus Q1 2026’s $2.87), the top of UNP’s usual 18 to 22 times range. The reverse DCF and the multiple agree: priced for everything going right.

Nothing about that math says sell. All of it says don’t add here.

12. Why It’s Part of the Universe

Union Pacific stays in the Dividend Universe without debate: the moat is generational, the dividend is covered twice over by earnings, and management just demonstrated, in real dollars, that the payout outranks the buyback.

But, it will not be on the July 5th Best Buys Now list, because membership in the universe answers one question and price answers another. At $267 against a $224 buy-below, you’re paying full fare for a railroad that is about to spend years and billions on the most complicated merger in its history.

If you own it: keep collecting the 2.1%, reinvest elsewhere, and let the streak do its work. If you don’t: put it on the list and wait. Railroads sell off twice a decade like clockwork, on recession fear or regulatory headlines, and the next scare is your entry.

What would change our mind, in either direction: a price below $224 makes this a buy regardless of the merger noise. STB approval with clean conditions would justify raising the buy-below. A dividend freeze to fund the deal or a credit downgrade below strong investment grade would trigger a full-universe review.

Wonderful company, wrong price. That sentence is most of what Dividend School Pro exists to tell you, month after month.

P.S. Today the whole thing was open, buy-below price and all. Most months the $224 number, the reverse DCF, and the verdict sit behind the paywall. Dividend School Pro is one of these, every month.

Realty Income raised its monthly payout again. NextEra hiked 10%. Johnson & Johnson notched its 64th straight annual increase. Duke Energy quietly marked its 100th consecutive year of paying a dividend. Meanwhile, two of the names you own were busy reshaping themselves from the inside.

Here is everything that moved across your universe, starting with the one most of you hold.

In this issue:

• Realty Income’s 671st straight monthly dividend (the full story below)

• Union Pacific draws a line in the sand on its $85 billion merger

• S&P Global spins off a piece of itself

• The two-week scorecard for all 22 names

• Three dates worth putting on your calendar

Realty Income paid its 671st consecutive monthly dividend

Realty Income raised its monthly dividend to $0.2710 a share. That works out to about $3.25 a year and a yield near 5.3%.

If you have followed the company for any length of time, the streak is the headline. This was the 671st consecutive monthly dividend, and the raise extends a record that has made “The Monthly Dividend Company” a core holding for income investors who like getting paid on a schedule they can budget around.

Scotiabank used the moment to reiterate its Sector Outperform rating with a $67 target. That stands out, because the broader analyst consensus has drifted toward Hold. When the crowd cools and a covering analyst leans in, it is worth asking which side is reading the cash flows correctly.

For most income portfolios, the takeaway is simple. The thing you own Realty Income for, a dependable and slowly growing monthly check, did exactly what it is supposed to do.

Two of your names are quietly changing shape

That is one of three lead stories this issue. The other two are about companies reshaping themselves while the rest of the market looked elsewhere.

Union Pacific is defending its roughly $85 billion merger with Norfolk Southern, and management just spelled out the single condition that would make it walk away from the table. S&P Global, meanwhile, handed shareholders stock in a brand-new company and left the business you own looking very different than it did a month ago.

Both move the long-term cash flows behind your dividends. Here is what happened, and what to watch.

If you own dividend stocks and want a calm, every-other-week read on what actually happened to them, the full Dividend Universe News is for paid subscribers. Same names you hold, same plain-English breakdown, no hype. Upgrade to read the rest.

Read more

“If the dividend only yields 0.81%, why would any income investor bother owning it?”

That is exactly the right question to ask. And the answer is a number most beginners never bother to calculate.

It is called yield on cost. Once it clicks, a tiny starting yield stops being a dealbreaker.

In today’s post, we will discuss:

• What yield on cost actually measures

• Why your current yield and your yield on cost drift apart over time

• Microsoft as our guinea pig

• How to use the number without fooling yourself

Okay, let’s dive in.

The two yields most people blur together

There are two different yields hiding behind the same word, and beginners mix them up all the time.

Current yield is the annual dividend divided by today’s share price. It is the number on every stock screener. For Microsoft at roughly $450 a share, paying $3.64 a year, that is 0.81%.

Yield on cost is the annual dividend divided by what you paid, your own cost basis. It is personal to you, and it does not show up on any screen.

Here is the key idea. The day you buy, those two numbers are identical. From that day forward, they go their separate ways.

Your cost basis is frozen at the price you paid. The dividend, in a healthy dividend-growth company, keeps climbing. So your yield on cost rises every single year you hold, even though the screener still shows the same small current yield to everyone looking today.

Next week I count the other half of Microsoft's payout, the buybacks that never show up as a yield. If you want it free in your inbox, subscribe here.

Microsoft as our guinea pig

Let’s look at Microsoft to see how far those two numbers can drift.

Microsoft pays $3.64 a year right now. The dividend has grown around 10% a year for two decades, and the company has raised it for more than twenty years straight.

A dividend growing 10% a year doubles in a little over seven years. That is the engine.

Now imagine you bought Microsoft back in 2015, around $45 a share. (Treat that price as a rough illustration, not your exact basis.) Watch what today’s dividend does against that old purchase price:

• What you paid: ~$45

• Current annual dividend: $3.64

• Your yield on cost: $3.64 / $45 = about 8.1%

• The screener’s current yield today: 0.81%

Same company. Same dividend. One number is 0.81% and the other is north of 8%.

The 2015 buyer is collecting close to 8% a year on the money they originally put in, while a buyer today starts at 0.81%. Someone who bought even earlier, back around $33 in 2013, has already crossed into double-digit yield on cost.

The yield looked trivial in year one. It did not stay trivial.

How to use it without fooling yourself

Yield on cost is a useful lens, and it is also easy to abuse. Here is how I think about keeping it honest.

Use current yield to decide what to buy today. When you are comparing two stocks you might purchase right now, you both start the clock at the current yield, so that is the fair comparison.

Use yield on cost to decide what to keep. A holding with a modest current yield but a fast-growing payout can quietly become one of the best income streams in your portfolio, which is the case for holding through a low headline yield.

The growth rate matters more than the starting yield. A 0.81% yield growing 10% a year passes a 3% yield growing 2% a year in about twelve years, and then pulls away for good.

Where investors get this wrong

Yield on cost rewards patience, and it also flatters you in ways that can cloud your judgment.

The biggest trap is treating it as a return. It is not. Yield on cost ignores the share price entirely, so it tells you nothing about whether the stock is cheap, fair, or expensive today.

A second trap is letting a high yield on cost talk you into holding a broken business. The number keeps looking great right up until the dividend gets cut, because it is anchored to a price from years ago. If the business quality slips, your cost basis will not save you.

The last trap is comparison. Your 8% yield on cost is not better than someone else’s 4% current yield, because they are two different measurements. Comparing them is like comparing your mortgage rate from 2015 to today’s listing price.

Yield on cost only works as a reason to hold when the dividend keeps growing and the underlying business stays healthy, which is why the safety work in last week’s deep dive comes first.

The takeaway

A small current yield attached to a fast-growing, well-covered dividend can turn into a large yield on cost given enough time, which is the whole reason a quality compounder like Microsoft belongs in a dividend-growth sleeve.

The dividend, though, is only half the cash Microsoft hands back to shareholders. The other half never shows up as a yield at all. Next week I will show you how to count Microsoft’s buybacks, why they quietly shrink your share count in your favor, and why they are the first thing to get cut when capital spending explodes.

If you want that buyback piece free in your inbox next week, the newsletter’s here.

That will wrap up today’s discussion.

If I can be of any further help, please don’t hesitate to reach out.

Until next time, stay safe out there,

Take care,

Dave

P.S. Here's the part worth remembering: the day you buy, the yield is the worst it will ever look. From there it only grows.

Upgrade to Paid

Scorecard

Microsoft is the rare company that scores a 94 on dividend safety while quietly rewriting the cash-return math on which the score is built. This month, we look at why both things are true at once.

1. Intro

Run Microsoft through a dividend safety screen today and it comes back a 94 out of 100. Near perfect.

The payout eats about a quarter of earnings. Free cash flow covers it almost three times over. The balance sheet is one of two in America still rated AAA. The company has raised the dividend every year for more than two decades.

Then look at one number the screen never sees: Microsoft plans to spend roughly $190 billion on capital expenditures in calendar 2026.

That is about seven times the entire dividend. And it is the reason a 94 might be the most misleading number in this whole report.

A safety score is a photograph. It captures a company as it was over the last several years of reported numbers. Microsoft just walked out of the frame. The company that earned that 94 returned more cash to shareholders than it spent building its own future. The company reporting next year will spend more building its future than almost any business in history. Same dividend. Same ticker. Very different math.

This deep dive answers one question. Is Microsoft’s dividend as safe as the score says, or is the score reading a chapter the company already finished writing?

2. The bet

Microsoft is a toll booth on the digital economy that happens to pay a tiny, fast-growing dividend.

For an income investor, the appeal was never the yield. It was the combination of a payout that compounds near 10% a year and a business durable enough to keep doing it. A 0.92% yield that grows 10% a year and never gets cut is worth more over twenty years than a 5% yield that stalls. That is the trade Microsoft offers.

The bet is that the AI buildout strengthens that toll booth rather than starving the dividend that rides on top of it. Get that judgment right and you own one of the great compounding machines of the era. Get it wrong and you paid a fortress price for a company that just turned far more capital-hungry than its reputation suggests.

3. What the company does

Microsoft sells the software and computing that businesses and people run their day on.

Three things drive it. There is the productivity stack most offices live in: Windows, Office (now Microsoft 365), Teams, and LinkedIn. There is Azure, the cloud platform companies rent instead of running their own server rooms. And there is everything personal: Windows licenses, Xbox, search, and devices.

Think of Azure as renting apartments instead of building your own house.

A company that would once have bought servers, hired staff, and cooled a room full of hardware now pays Microsoft a monthly bill and lets Microsoft own the building. The tenant gets flexibility and no maintenance headaches. The landlord gets a check every month, forever, and a tenant who finds moving out more trouble than it is worth.

That last part is the whole game. Once a business runs its email, its files, its identity logins, and its custom software on Microsoft, switching to a competitor means retraining every employee and rebuilding systems that already work.

Most companies decide the hassle is not worth it. They stay, and they keep paying.

Pull Microsoft apart and three engines show up, each one bigger than most companies on the market. In fiscal 2025, Productivity and Business Processes (Microsoft 365, Dynamics, LinkedIn) brought in about $121 billion. Intelligent Cloud (Azure, server products, GitHub) brought in about $106 billion. More Personal Computing (Windows, Surface, Xbox, search) added close to $55 billion. Three businesses, each generating tens of billions a year, sitting under one roof.

Who actually pays for all of this? Close to everyone. Microsoft’s customer base is one of the broadest in technology: nearly the entire Fortune 500, several hundred thousand mid-market firms, most major governments, the bulk of small businesses running Windows, and about 89 million consumer Microsoft 365 subscribers.

That consumer number grew from 51.9 million in 2021, a quiet mid-teens compounder running underneath the louder enterprise story.

The stickiness shows up in one figure better than any other. Microsoft’s commercial backlog, the revenue it has signed under contract but not yet delivered, reached $368 billion at the end of fiscal 2025 and $627 billion by the third quarter of fiscal 2026, up 99% year over year — a doubling in a single year on long-dated AI and cloud commitments. Think of that backlog as a freight rail timetable.

The trains are already scheduled and the tickets already sold, which is how a software company can spend like a utility and still sleep at night.

The relationships deepen rather than fade.

Once a company puts its employee logins on Microsoft’s identity system, then its email, then its files, then a Copilot assistant on top, leaving becomes close to unthinkable. Customers with 50,000 or more Copilot seats quadrupled over the past year. Accenture alone runs nearly 740,000 Copilot seats. This is not a customer base that turns quickly, and that is the bedrock under the dividend.

4. How they make money

We just met the three engines. The more useful question for an income investor is how the cash actually arrives, because the billing model is what makes Microsoft’s cash flow so steady and the dividend so easy to fund in a normal year.

Two motions do most of the work. Microsoft 365 bills per seat, a fixed charge every month or year for each employee, which throws off smooth, predictable revenue that barely flinches with the economy. Azure bills on consumption, charging for compute and storage as customers use it, with multi-year enterprise commitments sitting behind that usage. Azure grew 40% last quarter and is the fastest-moving piece of the mix. LinkedIn and Dynamics layer their own recurring subscriptions on top.

The economics are the dream version of software. A customer signs up, and the cost of serving them barely rises as they stay, so gross margins on cloud and software run high and improve with scale. That is why a few points of revenue growth drop through to a lot more profit.

The headline results, from Microsoft’s own filings:

• Fiscal 2025 revenue: $281.7 billion, up 14.9%

• Fiscal 2025 net income: $101.8 billion, up 15.5%

• Fiscal 2025 diluted EPS: $13.64, up 15.6%

• Microsoft Cloud revenue: $168 billion, up 23%

• Most recent quarter (Q3 FY2026): revenue $82.9 billion, EPS $4.27 (up 21% year over year), AI now at a ~$37 billion annualized run rate, up 123%

A high-quality, growing, cash-rich business. Now the part you pay for: whether that quality is enough to protect the dividend through the most expensive building project in corporate history, and what the real risk is if it is not.

The free magnet ends here. Everything below is the paid build: the moat, the financials, the full dividend safety read that the 94 hides, the forward cash-flow scenarios, a bull/base/bear valuation, and the buy-below price.

Want to know whether a 94 safety score is hiding the real risk? Want the forward free-cash-flow scenarios? Want the buy-below price I would actually pay? Everything below is for paid subscribers.

Included is a downloadable PDF of the full deep dive to keep.

Read more

In this episode of Dividend School Live, I walk through why earnings can hide a dividend a company can’t actually afford, and why free cash flow tells the real story.

We use AT&T’s 2022 dividend cut as a cautionary tale, look at why MasterCard’s tiny payout is rock solid, cover how REITs and utilities break the “normal” rules, and finish with a simple four-step checklist you can run on any dividend stock.

Chapters

00:00  Welcome & today's question: is this dividend safe?
00:23  The big idea: a payout ratio only means something in context
00:50  Why the "under 60% = safe" rule fails
01:32  What the payout ratio actually measures
02:10  Earnings vs. cash: income statement vs. cash flow statement
05:01  The better lens: dividends ÷ free cash flow
08:17  Case study: how AT&T's "safe" dividend got cut
16:28  The flip side: why MasterCard's tiny payout is bulletproof
18:30  High yield vs. fast compounders, and why you want both
20:02  When a high payout ratio is okay (Pepsi & watching the trend)
22:13  Special cases: REITs (FFO/AFFO) and utilities
26:36  Your 4-step dividend safety checklist
28:23  Wrap-up

One-line takeaway

The payout ratio isn’t a number you read, it’s a question you ask: is the dividend funded by real cash the business can keep generating?

Get more from Dividend School in the Substack app

Available for iOS and Android

Get the app

That is exactly when I slow down.

When I screened high yielders recently, Conagra Brands (CAG) jumped out with a yield north of 10%. I read the filings, ran the numbers, and passed. This post walks through why.

The lesson matters more than the stock. A high yield is the last number I check. The number that lures you in tells you almost nothing about whether the cash will keep flowing. The business does.

In today’s post, we will learn:

• What a yield trap actually is, and why the yield rises

• How to analyze the business before you touch the dividend

• How to read payout ratios and free cash flow payout ratios

• A simple checklist for stress-testing any high yield

• The common mistakes that catch income investors

Okay, let’s dive in and use Conagra as our guinea pig.

Why a high yield is usually a symptom

Dividend yield is simple math. You take the annual dividend per share and divide it by the share price.

That means a yield can climb for two very different reasons.

The healthy reason is that a company raises its dividend while the business grows underneath it. The unhealthy reason is that the share price collapses while the dividend stays put. The yield looks identical on a screener. The story behind it is night and day.

Conagra is the second kind.

The company last raised its dividend in October 2023, to an annualized $1.40 per share ($0.35 a quarter) from $1.32, and it has not raised that rate since (per Conagra’s fiscal 2024 and fiscal 2025 8-K earnings releases). The yield did not climb because the payout grew. It climbed because the stock fell more than 40% from its 52-week high.

That is the definition of a yield trap. A fat yield created by a falling price, attached to a business that is shrinking.

The trap works because the headline number is real. You really do collect that yield, right up until the dividend gets cut. And when it gets cut, the price usually falls again, so you lose on both ends.

So the yield is where I finish. The business is where I start.

Step one: analyze the business, not the dividend

A dividend is an output. It gets paid out of the cash a business generates. If the cash dries up, the dividend follows, no matter how proud management is of the streak.

So the first question is always the same. Is the underlying business getting stronger or weaker?

Let’s look at Conagra’s top line. Here are net sales over the last few years:

• FY2025 net sales: $11.6 billion, down 3.6% (organic down 2.9%)

• FY2024 net sales: $12.05 billion

• FY2026 guidance: organic net sales change of (1)% to 1%, basically flat

(per Conagra’s fiscal 2025 10-K and third-quarter fiscal 2026 earnings release)

Sales have been flat to down for three straight years. A packaged-food company living on legacy brands like Healthy Choice, Marie Callender’s, Banquet, and Slim Jim is fighting falling volumes and price-sensitive shoppers.

Flat revenue is survivable. Falling earnings power is the real problem.

Here is the metric that tells the story. Adjusted EPS strips out one-time items and shows the underlying profit trend:

• FY2023 adjusted EPS: $2.77

• FY2024 adjusted EPS: $2.67

• FY2025 adjusted EPS: $2.30

• FY2026 guidance: approximately $1.70

(per Conagra’s fiscal 2023 through fiscal 2025 8-Ks and the third-quarter fiscal 2026 earnings release)

Through fiscal 2025, adjusted EPS is already down about 17%. If guidance holds, that becomes a roughly 39% decline by fiscal 2026, against a dividend that has been frozen at $1.40 since the last raise. You can already feel the squeeze coming.

If you want to spot a yield trap before it traps you, that is the whole reason this newsletter exists. One dividend breakdown in your inbox, free, every week.

Learn how to spot yield traps

The impairment nobody wants to talk about

Now for the part that put this stock in my too-hard pile.

In its second quarter of fiscal 2026, Conagra reported a diluted loss of $1.39 per share, driven mainly by non-cash goodwill and brand impairment charges (per the second-quarter fiscal 2026 8-K).

An impairment is management telling you, in accounting language, that the brands carried on the balance sheet are worth less than they used to think. When a food company writes down the value of its own brands, it is admitting the moat is leaking.

These charges are non-cash, so they do not directly drain the bank account. They matter anyway. They are the clearest signal that the business is worth less than it was, and they dragged Conagra’s trailing earnings into the red, which is why the stock now screens with no meaningful P/E at all.

A company impairing its own brands is the opposite of the See’s Candies story, where the brand let Buffett raise prices for fifty years.

Step two: stress-test the dividend with payout ratios

Once you understand the business, you test whether it can keep funding the payout. I use two ratios, and I always look at the trend, not a single year.

The first is the payout ratio. You divide the dividend per share by earnings per share. It tells you what slice of profit goes out the door.

Watch what happens as the dividend gets raised once, then frozen, while earnings fall:

• FY2023: $1.32 / $2.77 = 48%

• FY2024: $1.40 / $2.67 = 52%

• FY2025: $1.40 / $2.30 = 61%

• FY2026 (guided): $1.40 / $1.70 = 82%

The payout ratio climbed from the high 40s toward a guided 82% in three years. After the October 2023 raise, the dividend never moved again. Earnings did all the work. A payout pushing past 80% leaves almost no cushion for a bad year.

The second ratio is the one I trust most for a capital-heavy business: the free cash flow payout ratio.

Free cash flow is the cash left after a company pays to run and maintain itself. You take cash from operations and subtract capital expenditures. Dividends get paid in cash, so cash coverage is what actually keeps the check from bouncing.

On a full-year basis, fiscal 2025 looked fine:

• Cash from operations: about $1.7 billion

• Capital expenditures: $389 million

• Free cash flow: about $1.3 billion ($1,303 million)

• Dividends paid: $669 million

• Free cash flow payout ratio: 51%

(per Conagra’s fourth-quarter fiscal 2025 8-K and the fiscal 2025 proxy statement)

Fifty-one percent is comfortable. If I had stopped at the fiscal 2025 annual report, I would have called this dividend safe.

So I looked at the most recent numbers. They tell a different story.

When the cushion starts to thin

Here is fiscal 2026 so far, straight from the earnings releases.

First quarter (8-K):

• Free cash flow: negative $26 million

• Dividends paid: $167 million

First half (8-K):

• Free cash flow: $113 million

• Dividends paid: $335 million

• Free cash flow payout ratio: 296%

In the first half of its current year, Conagra paid out nearly three times the free cash flow it produced. The balance sheet covered the gap.

Now, one honest caveat. Food companies generate most of their cash in the back half of the fiscal year, so a weak first-half payout ratio always looks scarier than the full year will. In its third-quarter update, management guided full-year free cash flow conversion of about 105% of adjusted net income.

That points to full-year free cash flow well below the $1.3 billion Conagra earned in fiscal 2025, against a dividend that still costs about $669 million a year. The full-year payout is probably still covered. The cushion that was 51% is heading toward the high 70s, on a business whose earnings are still falling.

A shrinking margin of safety on a shrinking business is how a safe-looking dividend turns into an unsafe one.

Step three: check the balance sheet for competing claims

The cash that pays the dividend is the same cash that pays down debt. When a company carries a lot of debt, those two priorities fight.

Conagra ended fiscal 2025 with net debt of about $8.0 billion and a net leverage ratio of 3.6 times (per the fourth-quarter fiscal 2025 8-K). Management has been clear that protecting its investment-grade credit rating and reducing leverage sit at the top of the list.

That is the bind. Earnings are falling, the payout ratio is climbing toward 80%, free cash flow is shrinking, and a big debt load is competing for every dollar. Something usually gives. More often than not, the dividend is the release valve.

How to use this in your own process

You do not need a finance degree to run this analysis. You need the habit of asking the questions in the right order.

Here is the checklist I use on any stock with a yield that looks too good:

• Why is the yield high? Did the dividend grow, or did the price fall? A price-driven yield is a red flag.

• Is the business growing or shrinking? Check three years of revenue and adjusted EPS, not one.

• Are there impairments? A company writing down its own brands or goodwill is telling you something.

• What is the payout ratio, and which way is it trending? A frozen dividend plus falling earnings equals a rising payout. Above 80% is a warning.

• Is the dividend covered by free cash flow? Use cash from operations minus capital expenditures, and look at the full year alongside the recent trend.

• How much debt is competing for the cash? High leverage plus a high payout narrows a company’s options fast.

Run those six questions and the high yielders sort themselves into two piles pretty quickly.

Common mistakes income investors make

The biggest one is buying the yield and skipping the business. The screener shows 10%, the brand name feels familiar, and the analysis stops there.

The second is trusting reported EPS without looking closer. Conagra’s reported earnings have been whipped around by a big tax benefit in one year and impairments in another. Adjusted EPS and free cash flow give you a cleaner read on what the business actually earns.

The third is anchoring on one good year. Fiscal 2025’s free cash flow payout of 51% looked great in isolation. The trend underneath it was the real signal.

The last one is assuming a long-paying company will always pay. A dividend is a board decision, reviewed every quarter. A board defending a credit rating will choose the balance sheet over the payout when it is forced to choose.

The takeaway

A dividend is only as safe as the business behind it, so analyze the company first and let the yield be the last number you check.

I passed on Conagra because the business is shrinking, the brands are being impaired, the payout ratio is marching toward 80%, and the cash cushion is thinning while a heavy debt load competes for the same dollars. The 10% yield is the bait. The deteriorating business is the trap.

That does not make Conagra un-investable at every price, and it does not guarantee a cut next quarter. It means the headline yield is doing a poor job of describing the risk, and that is reason enough for me to look elsewhere for my income.

That is going to wrap up our discussion for today.

As always, thank you for taking the time to read this post, and I hope you find something of value on your investing journey.

If I can further assist, please don’t hesitate to reach out.

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

Dave

P.S. These same six checks work on any yield that looks too good. Next time I will point them at a high yielder I actually kept, and why. Subscribe free to get it.

Business Overview

Texas Instruments is one of the best-run semiconductor companies on the planet, with a 22-year dividend raise streak and a cost advantage competitors can’t copy. We still left it out of our 20-stock Dividend Universe. This deep dive explains why.

1. The dividend that outran its cash

In 2024, Texas Instruments paid its shareholders $4.8 billion in dividends.

That same year, the company generated $1.5 billion in free cash flow. From the Q4 2025 earnings release, that’s a free cash flow payout ratio of 320%. For every dollar of free cash the business produced, it sent more than three dollars out the door to shareholders.

A company can do that for a while. It can’t do it forever.

So here’s the question this deep dive answers: when a genuinely great company lets its dividend run ahead of its free cash flow for years, does it still belong in a dividend portfolio? And if so, at what price?

2. The bet

Texas Instruments (TXN) is the world’s largest analog chipmaker, and the bet is simple: TI spent four years and roughly $20 billion building factories nobody else was willing to build, and now it gets to harvest that capacity for decades.

If the bet works, free cash flow per share climbs past $8 in 2026 and keeps growing, the dividend gets re-covered by cash, and today’s shareholders own a cash machine with a 22-year raise streak.

If the bet stalls, you own a dividend funded by the balance sheet at 49 times earnings.

3. What the company does

TI makes analog and embedded processing chips. Analog chips are the translators of the electronics world. The real world runs on continuous signals: temperature, pressure, sound, voltage. Computers run on ones and zeros. Analog chips convert one into the other.

Think of every device that touches the physical world. A factory robot sensing the position of an arm. A car managing battery power. A medical monitor reading a heartbeat. Each one needs dozens of these small, cheap chips.

That’s TI’s sweet spot. The company sells roughly 80,000 products to about 100,000 customers, mostly in industrial and automotive markets. No single chip or customer makes or breaks the year.

Two more things make analog a lovely business for income investors.

First, analog chips have long lives. A chip designed into an industrial controller can sell for 10 or 20 years with no redesign. Compare that to a smartphone processor that’s obsolete in three.

Second, the chips are cheap, often under a dollar. When a part costs fifty cents and a failure could shut down a production line, no engineer switches suppliers to save a nickel.

4. How they make money

TI reports two main segments, and one of them does the heavy lifting.

From the Q4 2025 earnings release, full-year 2025 segment results:

• Analog: revenue $14.0 billion (+15%), operating profit $5.4 billion

• Embedded Processing: revenue $2.7 billion (+6%), operating profit $304 million

• Other: revenue $979 million, operating profit $307 million

Analog produces about 79% of revenue and nearly 90% of segment operating profit. Embedded (microcontrollers and processors) is the smaller, lower-margin sibling.

The unit economics are the story. TI manufactures most of its own chips on 300-millimeter wafers, which cut the cost per chip roughly 40% below the older 200-millimeter standard most analog competitors use. Owning the fabs and running the bigger wafers means TI keeps gross margins in the high 50s even at the bottom of a brutal industry cycle.

Here’s the 2025 scoreboard, from the Q4 2025 earnings release:

• Revenue: $17.7 billion (+13% from $15.6 billion in 2024)

• Gross profit: $10.1 billion (57% gross margin)

• Operating profit: $6.0 billion (34% operating margin)

• Net income: $5.0 billion

• Diluted EPS: $5.45 (vs $5.20 in 2024)

And the recovery accelerated into 2026. From the Q1 2026 earnings release: revenue of $4.83 billion grew 19% year over year, EPS came in at $1.68 versus $1.28, and management guided Q2 to $5.0 to $5.4 billion in revenue with EPS of $1.77 to $2.05.

The business is working. Now let’s get to why it’s still outside our universe.

This is the point where the paywall drops in a regular Dividend School Pro deep dive. Everything below, the dividend autopsy, the valuation, and the verdict, is what subscribers get every month.

Upgrade to Paid

5. Moat and competition

TI’s moat rests on three legs.

The first is manufacturing cost. The 300mm wafer advantage is structural. Competitors like Analog Devices, NXP, Infineon, and STMicroelectronics largely outsource production or run older fabs, so TI can underprice them and still earn fatter margins. Building a competing 300mm analog fab network would cost tens of billions and take a decade.

The second is breadth and distribution. TI sells those 80,000 products more and more through TI.com, making it the default catalog for engineers. Once a part is designed into a product, it stays designed in for the product’s life.

The third is switching costs. Requalifying a fifty-cent part in a safety-critical automotive or industrial application costs far more than the part ever will. Customers stay put.

The proof shows up in profitability. Even in 2024, the worst year of the analog downturn, TI posted a 35% operating margin (from the 2024 figures in the Q4 2025 release: $5.5 billion operating profit on $15.6 billion of revenue). Most industrial companies would kill for that margin at the top of their cycle. TI did it at the bottom.

6. Financials

The income statement is elite. The balance sheet is where the last four years left a mark.

From the Q1 2026 earnings release, as of March 31, 2026:

• Cash and short-term investments: $5.1 billion

• Total debt: $14.1 billion ($12.9 billion long-term plus $1.1 billion current)

• Total equity: $16.8 billion

• Property, plant and equipment at cost: $17.9 billion, up from $16.0 billion a year ago

Debt of $14.1 billion against $5.0 billion of net income is manageable for a business this profitable, and TI carries strong investment-grade ratings. But that debt pile grew through the capital spending (capex) cycle while the company kept paying a dividend its free cash flow didn’t cover. The borrowing didn’t fund growth alone. Some of it funded the payout.

Cash generation tells the recovery story in one table. TI defines free cash flow as operating cash flow minus capex, plus CHIPS Act incentive proceeds:

• FY2024: operating cash flow $6.3B, capex $4.8B, free cash flow $1.5B

• FY2025: operating cash flow $7.2B, capex $4.6B, free cash flow $2.9B

• Trailing twelve months (TTM) through Q1 2026: operating cash flow $7.8B, capex $4.1B, free cash flow $4.4B

Free cash flow nearly tripled in five quarters as the capex wave crested. That’s the right direction. It’s still not enough to cover the dividend, which brings us to the heart of the piece.

7. Dividend deep dive

Start with the good news.

TI raised its dividend 4% in September 2025, to $1.42 per quarter ($5.68 annualized), marking 22 consecutive years of increases per the company’s September 18, 2025 announcement. At a recent price near $288, that’s a yield right around 2.0%.

Now the uncomfortable news. Let’s look at coverage from both directions.

On earnings, from the Q4 2025 release: TI declared $5.50 per share in dividends during 2025 against GAAP EPS of $5.45. That’s a 101% earnings payout ratio. The full year of dividends exceeded the full year of profits.

On free cash flow, dividends paid versus free cash flow generated:

• FY2024: $4.8B paid vs $1.5B FCF, a 320% payout

• FY2025: $5.0B paid vs $2.9B FCF, a 170% payout

• TTM Q1 2026: $5.1B paid vs $4.4B FCF, a 116% payout

The trend is improving fast, and that deserves credit. But a 116% free cash flow payout means the balance sheet still funds part of the dividend: cash on hand, debt issuance ($1.2 billion of long-term debt issued in 2025 per the Q4 release), and CHIPS Act money.

How does a 22-year streak survive that? Three cushions: $5.1 billion of cash and short-term investments, an investment-grade balance sheet with room to borrow, and a capex cliff that’s already visible (Q1 2026 capex of $676 million versus $1.1 billion a year earlier).

The dividend growth rate tells you management knows the math. The raises have stepped down every year: roughly 13% in 2021, 8% in 2022, 5% in 2023 and 2024, and 4% in 2025. A company that used to compound its dividend in the teens now raises it at the pace of inflation.

Our dividend safety read: the dividend will almost certainly be paid and raised over the next few years. The streak is too important to management and the recovery is real. But “safe” in our framework means covered by free cash flow with room to spare, and TI hasn’t cleared that bar since 2021. That single fact is most of the reason TXN sits on our watchlist and outside our 20-stock universe.

8. Growth prospects

Here’s the bull case, and it’s a good one.

TI built four new 300mm fabs ahead of demand. The capacity now exists, the spending is winding down, and management said on the Q1 2026 call that free cash flow per share could exceed $8 in 2026 if current demand trends continue. Capex guidance steps down from $4.1 billion (TTM) toward the $2 to $3 billion range.

Run the math on what that means:

• TTM free cash flow today: $4.4 billion

• Dividends paid: $5.1 billion

• FCF at $8 per share on 914 million diluted shares: roughly $7.3 billion

If management delivers, coverage flips from 116% to about 70% without a single extra dollar of revenue growth. Add the demand tailwinds (industrial recovery, data center power management, rising chip content per car) and the CHIPS Act incentives still flowing ($630 million of proceeds in the trailing twelve months per the Q1 2026 release), and the dividend goes from stretched to comfortable inside two years.

That’s the scenario that would earn TXN a spot in the universe. It hasn’t happened yet.

9. Management and capital allocation

CEO Haviv Ilan and his predecessors deserve real credit for conviction. TI told investors for years that it would build capacity through the downturn while competitors hid, and it did. The strategy was unpopular, expensive, and probably right.

The capital allocation record during the crunch is revealing:

• Total returned to owners, TTM through Q1 2026: $6.0 billion

• Dividends paid: $5.1 billion (+4%)

• Buybacks: $982 million (down 38% year over year)

When cash got tight, management protected the dividend and throttled the buyback. That’s the right priority for income investors, and it tells you where the dividend sits in the pecking order: untouchable.

The flip side: returning $6.0 billion while generating $4.4 billion of free cash flow means the company returned cash it didn’t make. We’d rather see returns funded by the business, full stop.

10. Risks

Ranked by what worries us most.

First, the FCF recovery stalls. The whole thesis rests on capex falling while revenue grows. A second leg down in industrial or automotive demand, or a tariff shock to the semiconductor supply chain, would leave the dividend uncovered for longer with less cushion than in 2022.

Second, the price. At roughly 49 times trailing earnings, the market has already paid for the recovery. If $8 of FCF per share arrives on schedule, the stock is still trading at 36 times that number. Rich multiples turn good news into “as expected” and bad news into a 20% drawdown.

Third, cyclicality is forever. Analog is the steadiest neighborhood in semiconductors, and TI’s revenue still fell from over $20 billion in 2022 to $15.6 billion in 2024. Another downturn will arrive. The only question is the date.

Fourth, China. A meaningful slice of TI’s revenue ships into China, where local analog competitors are improving and trade policy is a coin flip.

The bear case in one line: you’re paying a premium multiple for a dividend that free cash flow doesn’t cover yet, in an industry guaranteed to cycle again.

11. Valuation: a reverse DCF

A regular discounted cash flow (DCF) guesses at future growth and spits out a price. A reverse DCF flips the exercise: start from today’s price and solve for the growth rate the market is already paying for. Then ask one question. Is that growth believable?

Our inputs: an 8.7% discount rate (TI’s weighted average cost of capital), a 4.5% terminal growth rate (anchored to the current 10-year Treasury yield), and a 10-year growth stage. At $288 per share on 914 million diluted shares, the market values TI at near $263 billion.

Here’s the free cash flow growth baked into that price:

• Off today’s actual FCF ($4.35 billion TTM): 15.7% per year, every year, for a decade

• Off management’s promised $8 per share for 2026 (about $7.3 billion): 9.1% per year on top of the promise

Read those again. Even with management given full credit for the $8 before it is delivered, the price still demands 9% compounded growth for 10 years from a cyclical business that fell into the double digits from its 2022 peak to 2024.

Now run the same math at our buy-below:

• At $200, off the $8 promise: 4.6% implied growth, roughly nominal GDP

• At $200, off today’s actual FCF: 11%

One honest caveat: the 4.5% terminal rate is generous, which flattens the hurdle. These implied growth rates are floors, and the real bar sits higher.

That’s the whole case in two numbers. At $288 you need TI to be heroic for a decade. At $200, you need TI to be ordinary, and ordinary is what great companies deliver at a minimum. Our buy-below stays at $200.

12. Why It's Still Not In Our Universe

Texas Instruments is a great company. We mean that without qualification: the moat is real, the strategy was brave, and the free cash flow recovery is happening on schedule.

It’s still not in our Dividend Universe, for two reasons this framework exists to catch.

Free cash flow does not yet cover the dividend, and our universe requires actual coverage. Promises don’t count. And the price embeds the entire recovery at 49 times earnings, which leaves nothing for the next surprise.

So the call: avoid at $288, keep it on the watchlist, revisit below $200. Position size if it ever triggers: a normal 4 to 5% starter, built slowly, because semiconductors will always hand you a second chance to buy.

What would change our mind:

• a full year of free cash flow payout below 70%

• capex guidance holding in the $2 to 3 billion range

• and a price below our buy-below

Two of those three are plausible by mid-2027. We’ll be watching.

That’s the discipline.

A 22-year streak gets our respect. It doesn’t get our capital until the cash covers the check.

This is one stock. The Dividend Universe is twenty. Every one cleared a bar TXN couldn't. See what made the cut.

Upgrade to Paid

The June Dividend Universe Dispatch is ready. Here is what’s inside:

• Realty Income’s 135th dividend increase, and why the streak matters more than the size

• The stablecoin platform Visa and Mastercard are quietly building

• Union Pacific’s merger fight in Washington

• Quick hits on all 22 names in the universe

• The June dividend calendar and the catalysts I am watching

• The full scorecard, plus a downloadable PDF issue you can save or print

The first story is below for everyone. The rest lives behind the paywall.

Realty Income raises the dividend. Again.

Realty Income (O) did the thing it always does.

On June 9, the board raised the monthly dividend from $0.2705 to $0.2710 per share. That is the 135th increase since the company listed on the NYSE in 1994, and it puts the annualized payout at $3.252 per share. If you own shares as of the June 30 record date, the new rate lands in your account on July 15.

The raise itself is tiny, about 0.2%.

The signal matters more than the size. Realty Income raises in small steps, several times a year, in good markets and bad ones. That habit is the whole reason a 5.3% yielder earns a spot on our Best Buy Now list while most high yielders never make it past the first screen.

At $62.66, the stock trades well below our buy-below price. Safety score stays at Safe.

That is one of three lead stories this month. The other two cover the stablecoin rail Visa and Mastercard are building together, and the $71.5 billion railroad merger that hit three separate roadblocks in two weeks.

Below the line: the Visa and Mastercard stablecoin story, the Union Pacific merger fight, news on all 22 universe stocks, the June dividend calendar, and the full scorecard as a downloadable PDF.

Read more

They feel scary. The chart points down, the headlines are negative, and the crowd is busy buying something else. That discomfort is usually the price of admission for a quality company on sale.

Today I want to walk you through five dividend payers trading well below where they normally trade, and more importantly, how I decide a stock is actually cheap and not just falling. These are ideas to research, not a buy list to act on blindly. The goal is for you to run this screen yourself the next time the market hands you a sale.

In today’s post, we will discuss:

• How I decide a dividend stock is undervalued

• Why buybacks make this even more powerful

• The five names and the case for each

• How to use this screen in your own process

• The mistakes that turn a “bargain” into a value trap

Okay, let’s dive in.

How I decide a dividend stock is undervalued

I lean on two simple tools, and I treat the answer as a range instead of a single magic number.

The first tool is the stock’s own history. Every quality business trades in a rough valuation band over time. When the current price-to-earnings multiple sits near the low end of its own five-year range, that is my first flag. I am not comparing Mastercard to the market. I am comparing Mastercard to Mastercard.

The second tool is a rough discounted cash flow, or DCF. You do not need a fancy model. A back-of-the-envelope estimate of the cash a business will throw off over the next decade, discounted back to today, tells you whether the current price is asking for heroic growth or modest growth.

When both tools point the same direction, I pay attention.

Here is the judgment part. A 10x multiple on a shrinking business is expensive. A 20x multiple on a business compounding free cash flow at 12% a year can be cheap. Cheap and expensive are about what you get for the price, so the quality of the business has to come first.

And before any of that, the dividend has to be safe. If the company is paying out more than it earns or more than it generates in free cash flow, the yield is a warning light, not a gift.

Why buybacks make this even more powerful

There is a second engine working underneath these companies, and most beginners miss it.

When a business buys back its own shares, every remaining share owns a bigger slice of the company. Free cash flow per share can grow faster than total free cash flow, because the share count keeps shrinking.

Mastercard is the cleanest example you will find. The company can grow total cash flow at a healthy clip, then retire millions of shares on top of that, so the per-share figures compound faster than the headline growth rate. That gap is the buyback engine doing its quiet work.

The catch is that buybacks only create value when shares are repurchased below intrinsic value. A company overpaying for its own stock is destroying value in slow motion. Near a 52-week low, a quality compounder buying back shares is doing exactly what you want it to do.

Now, let’s look at the five.

Mastercard (MA)

Mastercard runs one of the best business models in the world. It sits in the middle of global card payments, takes a small cut of an enormous and growing flow of money, and spends very little capital to do it.

The stock has been sliding, and it recently touched a 52-week low while the broader market held up. Investors worry about consumer spending, cross-border travel, and a payments sector that has seen its multiples compress.

The business has not gotten the memo.

Here is the recent scorecard:

• Q1 2026 net revenue: $8.4 billion (+16% year over year)

• Q1 2026 adjusted EPS: $4.60 (up roughly 18%)

• Operating margin: around 59%

• Net revenue path: $18.9 billion (2021) growing to $32.8 billion (2025)

On capital return, this is a machine. According to Mastercard’s FY2025 10-K and its December 2025 board release, the company returned about $14.5 billion to shareholders in 2025, repurchased 21.1 million shares, and grew trailing free cash flow roughly 20% to $16.3 billion. The board then raised the dividend 14% to an annualized $3.04 per share, the 14th straight year of increases, and authorized a fresh $14 billion buyback on top of the existing program.

The valuation case is simple. Mastercard trades near the bottom of its recent multiple range while still compounding revenue and shrinking the share count. Mastercard has grown free cash flow at a 16%+ CAGR over the past ten years, while the market is pricing in 6% growth.

The yield is small, near 0.7%, so this is a total-return story rather than an income story.

The risk: a real recession would slow transaction volumes, and the stock is never statistically “cheap” on a raw multiple. You are paying a fair price for a great business, which is the deal Buffett took on See’s Candies.

Brown & Brown (BRO)

Brown & Brown is an insurance broker, and brokers are wonderful businesses. They earn commissions for placing insurance, hold very little risk on their own books, and have raised their dividend for 32 consecutive years.

The stock fell roughly 50% from its 2025 high, which is what pulled it onto this list.

Three things happened at once. The company made its largest acquisition ever, buying Accession Risk Management for a gross price of $9.825 billion (closed August 1, 2025), and funded part of it with new shares, which diluted existing holders. Organic growth slowed as commercial insurance pricing softened. Then a wave of fear that artificial intelligence could disrupt insurance brokers hit the whole group.

Let’s look at the numbers behind the drop:

• Q4 2025 total revenue: $1.6 billion (+35.7%, boosted by the acquisition)

• Q4 2025 organic revenue: down 2.8%

• Q4 2025 adjusted EPS: $0.93

• Trailing net margin: around 23.6%

That margin is the tell. This is still a highly profitable business that bolted on roughly $1.8 billion of annual revenue and 5,500 teammates, and the market is now valuing it well below the 25x-plus earnings it usually commanded.

The valuation case rests on normalized earnings once Accession is fully in the numbers. A rough owner-earnings estimate puts the stock somewhere near 11x to 13x, a level Brown & Brown almost never sees.

The risk: a big acquisition has to grow value per share, not only total revenue. If organic growth stays weak and integration drags, the cheap multiple can stay cheap. This one rewards patience and a close read of the next few quarters.

Want the full picture? I track a watchlist of quality dividend compounders with buy-below prices and dividend-safety grades for paid members. Two of today's five sit at the top of it.

Give me the full universe

Comcast (CMCSA)

Comcast is the free-cash-flow machine hiding in plain sight. It owns Xfinity broadband, NBCUniversal, Peacock, Sky, and the Universal theme parks, and it generates enormous cash.

The market hates it right now. The stock trades near a 52-week low at a single-digit trailing earnings multiple, because broadband subscriber growth has stalled and traditional video keeps shrinking.

Look at what the cash engine actually did.

According to Comcast’s January 2026 8-K, full-year 2025 free cash flow reached $19.235 billion, up 53% from the prior year. The April 2026 8-K showed $3.9 billion of free cash flow in Q1 2026, with $2.5 billion returned to shareholders in the quarter and 42 million shares retired. The company has lifted its dividend every year since 2008 and currently yields north of 5%, with a special dividend paid in January 2026 on top.

Here is the per-share math that makes this interesting:

• 2025 free cash flow: $19.2 billion (+53% YoY)

• Capital returned to shareholders in 2025: roughly $12 billion

• Trailing P/E: around 5, forward near 8

A company throwing off this much cash, shrinking its share count, and paying a 5% dividend does not need much growth to reward you. The valuation already assumes decline.

The risk: that decline could be real. Cord-cutting and broadband competition are genuine headwinds, and the market is betting the cash flow erodes. Your job is to decide whether the price already overpays for the gloom.

PepsiCo (PEP)

PepsiCo is a Dividend King, with 54 consecutive years of dividend increases behind brands like Pepsi, Gatorade, Lay’s, and Doritos.

The stock trades in the lower third of its 52-week range, weighed down by fears that weight-loss drugs will shrink snack demand and by softness in volume in its Frito-Lay business.

Management is responding with a plan you can actually evaluate. It cut prices on core snacks by up to 15% to win back volume and shelf space, a bet that higher volume offsets lower per-unit revenue.

Here is the valuation snapshot:

• Forward dividend yield: around 4%

• Normalized P/E: roughly 17x

• Historical price-to-free-cash-flow: closer to the 25x to 30x range over five years

A Dividend King yielding around 4% and trading well under its own historical multiple is rare. You are getting paid a healthy income while you wait for the volume plan to work.

The risk: if the weight-loss-drug story compresses snack consumption faster than expected, the volume recovery stalls and the cheap multiple is justified. The dividend looks secure either way, which is why this one fits a patient income portfolio.

Medtronic (MDT)

Medtronic makes medical devices, from pacemakers to insulin pumps to surgical tools, and it has raised its dividend for 48 straight years.

The stock sits near a 52-week low after falling more than 20% from its high, caught up in a tough stretch for medical-device names.

The dividend math holds up:

• Annual dividend: $2.84 per share

• Dividend yield: around 3.6%

• Payout ratio: roughly 79%, covered by cash flow

• Forward P/E: around 16x, against a depressed trailing figure

Medtronic guided to organic revenue growth near 5.5% for fiscal 2026 and plans to separate its diabetes business by the end of 2026, a move meant to sharpen the focus of the remaining company.

The valuation case is a steady Dividend Aristocrat trading at a forward multiple below its own norm, paying you 3.6% to wait for the spin-off and a return to high-single-digit earnings growth.

The risk is the one I watch most closely here. Medtronic’s return on invested capital has hovered near 8%, close to its cost of capital, so this is a slower compounder than the others on this list. If you have read my work on ROIC, you know that gap between returns and the cost of capital is where real value gets created, and Medtronic’s gap is thin.

How to use this screen in your process

You do not have to take my word on any of these. The point is the screen, so you can run it yourself.

Start with the same three questions every time:

• Is the current multiple near the low end of the company’s own five-year range?

• Does a rough DCF or owner-earnings estimate suggest the price is asking for modest growth, not heroic growth?

• Is the dividend covered by earnings and free cash flow, with a long history of increases?

If a name clears all three, then ask the hardest question of all. Why is it cheap, and is that reason temporary or permanent?

Mastercard and Comcast are cheap on fear about a slowdown that has not shown up in results. Brown & Brown is cheap on dilution and a fixable organic-growth dip. PepsiCo and Medtronic are cheap on slow growth that management is actively working to fix.

Temporary problems create opportunity. Permanent decline creates value traps. Telling them apart is the whole game.

The mistakes that turn a bargain into a trap

Chasing yield is the first and biggest. A dividend that looks too good usually is, and the market is often pricing in a cut. A safe 3% beats a doomed 9% every time.

Ignoring why a stock fell is the second. A low price is only a bargain if the business recovers, so the reason for the drop matters more than the size of the drop.

Trusting a single multiple is the third. A 5x earnings multiple means nothing without the context of whether the business is growing or shrinking, which is why the rough DCF and the quality check sit right next to the multiple.

Forgetting to check dividend coverage is the fourth, and it is why Nike did not make this list. The stock is near its low and looks cheap, yet it is currently paying out more than 100% of earnings and free cash flow, which is a flashing warning light rather than a green one.

One last note. Prices, yields, and multiples move every single day, so confirm the current figures before you act on any of these.

A quality dividend payer trading near its low, with a covered dividend and a temporary problem, is one of the most reliable setups in investing, and your edge is the patience to buy while it still feels uncomfortable.

As always, thank you for taking the time to read this post, and I hope you find something of value on your investing journey.

If I can further assist, please don’t hesitate to reach out.

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

Dave

P.S. Dividend School exists to make you the investor who runs the 3-question screen yourself, the one who can tell a real bargain from a value trap without waiting on anyone's hot tips. If that's who you want to become, join us below.

Yes, teach me to find these

Today I will walk you through the five most common mistakes I see dividend investors make, with the fix for each one. By the end, you will have a checklist you can run before you click buy on any income stock.

In today’s post, we will discuss:

• Mistake 1: Chasing the highest yield

• Mistake 2: Ignoring dividend safety

• Mistake 3: Buying the dividend and forgetting the business

• Mistake 4: Treating a high yield like dividend growth

• Mistake 5: Leaving compounding on the table

Okay, let’s dive in and learn how to avoid the biggest dividend mistakes.

Mistake 1: Chasing the highest yield

The trap is simple. A 9% dividend yield looks like free money, especially when the rest of the market pays 3%.

But yield is a math problem.

Yield equals annual dividend divided by share price. When the share price falls, the yield rises. And share prices often fall because the dividend itself is in trouble.

This is the textbook “yield trap.” A stock yielding double the market average is rarely a generous payer. The market has already discounted the stock, anticipating a cut.

A famous case study is AT&T. In early 2022, the stock yielded well above 8% and looked like a bargain to income investors. Then in April 2022, AT&T spun off WarnerMedia and reset its annual dividend from $2.08 to $1.11 per share, a 47% reduction. Investors who bought for the headline yield woke up with both a smaller dividend and a lower stock price.

The fix: treat any outlier yield as a warning sign. When you see a yield that looks too good, your first question is not “how do I get more of this.” It is “what does the market know that I don’t yet?”

Mistake 2: Ignoring dividend safety

This is the cousin of Mistake 1. Investors see the yield, smile, and skip the boring part. Can the company actually afford the payout?

The number you want is the payout ratio.

Payout ratio equals dividends paid divided by earnings (or free cash flow). It tells you what percentage of profit goes to the dividend.

A payout ratio above 100% means a company is paying out more than it earns. That math runs out. Eventually, the company cuts the dividend, takes on debt to fund it, or both.

Two examples make the point.

Coca-Cola pays out roughly 70% of its free cash flow as dividends. The remaining 30% funds capital expenditure, share repurchases, and the occasional bolt-on acquisition. That cushion is what lets Coke survive a soft year without touching the payout.

REITs work differently. They must distribute at least 90% of taxable income by law, which makes the standard payout ratio useless. For REITs, look at the AFFO payout ratio instead. Realty Income’s AFFO payout ratio sat at roughly 75% in fiscal 2024, leaving room for the company to keep growing the dividend.

The fix: before you buy the yield, run the math on coverage. The three ratios I look at:

• Payout ratio on earnings, ideally under 80% for most companies

• Payout ratio on free cash flow, ideally under 80%

• For REITs, AFFO payout ratio in the 70% to 85% range

If the dividend is barely covered today, the dividend is barely covered. There is no safety net underneath it.

Do you want to catch a dividend trap before it cuts your income? Do you want to run this same six-point checklist on your own watchlist? Do you want one new company deep-dive in your inbox every Sunday? The paid tier is here.

Count me in

Mistake 3: Buying the dividend and forgetting the business

This one bites a lot of new dividend investors.

The dividend becomes the whole thesis. The company behind it gets ignored.

But a dividend is only as durable as the business paying it. Weak businesses cut. Strong businesses raise.

General Electric is the textbook cautionary tale. For decades, GE was a dividend stalwart in nearly every income portfolio in America. By the mid-2010s, the business had quietly deteriorated, weighed down by GE Capital and a long list of strategic missteps. In November 2017, GE cut its quarterly dividend from $0.24 to $0.12. A year later, the dividend was cut again to a single penny per share. Investors who bought GE for the income lost both the dividend and most of their capital.

What were they missing? The business itself was eroding. Return on invested capital was falling. Cash flow was unreliable. The dividend was a symptom of a healthy past, not a healthy present.

The fix is the same fix Buffett has been preaching for 60 years. Buy good businesses first and the dividend takes care of itself.

Specifically, I want to see:

• Stable or growing revenue across a full economic cycle

• Strong free cash flow generation that funds the dividend with room to spare

• ROIC consistently above the cost of capital

• A real moat (brand, network effects, scale, or switching costs)

• A management team that allocates capital sensibly

Get the business right and the dividend follows.

Mistake 4: Treating a high yield like dividend growth

A 6% flat payer can look better than a 2% payer that raises its dividend every year. The 6% wins today. But the math gets interesting fast.

Compare two stocks.

Stock A pays a 6% yield with zero growth. Year ten, you still earn 6% on your original investment.

Stock B pays a 2% yield and grows the dividend 10% annually. By year ten, your yield on cost is around 4.7%. By year fifteen, it sits at roughly 7.6%. By year twenty, it is over 12%.

That second math is the snowball Buffett talks about. He bought Coca-Cola shares starting in 1988 at an average split-adjusted cost of around $2.45 per share. Coke pays roughly $2 per share in annual dividends today. Buffett’s yield on cost on those original shares is approaching 80% per year, every year, before he sells a single share.

The fix: weigh dividend growth alongside yield. A useful starting screen:

• Dividend growth rate over the last 5 and 10 years

• Years of consecutive dividend increases (Dividend Aristocrats have 25+, Kings have 50+)

• Payout ratio trend (if it is climbing toward 100%, growth is borrowed time)

• Earnings growth (the dividend can only grow as fast as profits over the long run)

A small yield on a fast-growing dividend will usually beat a large yield on a stagnant one. The compounding is the whole game.

Mistake 5: Leaving compounding on the table

The last mistake is the most common and the most expensive.

Dividends get spent or sit in cash, often in a taxable account. Then investors wonder why their total return looks nothing like the long-run studies they read.

The math here is brutal.

Going back to 1926, roughly 40% of the S&P 500’s total return has come from dividends, and a meaningful share of that comes from reinvesting those dividends, not just collecting them. Reinvested dividends buy more shares. Those shares pay their own dividends. That second layer buys still more shares. The snowball builds on itself.

If you are still in your accumulation phase, take the dividends and put them back to work. Most brokerages let you set up a Dividend Reinvestment Plan (DRIP) that does this automatically and commission-free.

A few practical notes:

• DRIPs let you buy fractional shares, so every penny goes to work

• In tax-advantaged accounts (IRA, Roth, 401k), reinvested dividends compound tax-free or tax-deferred

• In a taxable account, you still owe tax on the dividend even if it is reinvested

• REIT dividends are usually taxed as ordinary income, which makes a Roth or IRA the right home for them

The fix is straightforward. Hold dividend payers in tax-advantaged accounts when you can. Reinvest while you are still building wealth. Once you need the income, switch off the DRIP and take the cash. Until then, let it compound.

The through-line

All five mistakes share one root cause.

They come from buying a number on a screen and skipping the company behind it. A healthy company produces a strong dividend. The yield is just the receipt.

Safe, growing dividends come from strong businesses bought at fair prices. Everything else is noise around that core idea.

The dividend investor’s checklist

Save this and run through it before any dividend buy.

• Yield check. Is the yield reasonable relative to the company’s history and peers? An outlier yield is a question, not an answer.

• Coverage check. Is the payout ratio under 80% on both earnings and free cash flow (or 70% to 85% on AFFO for REITs)?

• Business check. Does the company have a real moat, stable free cash flow, and ROIC above its cost of capital?

• Growth check. Has the dividend grown over the last 5 to 10 years, and at what rate?

• Price check. Is the valuation reasonable on FCF yield, P/FFO, or your preferred tool?

• Account check. Am I holding this in a tax-advantaged account where it makes sense, and am I reinvesting?

If you can check all six boxes, you have a candidate worth deeper work.

Investor takeaway

Dividend investing is one of the slowest, surest ways to build wealth, but only if you respect the underlying business. The number on the screen is the consequence of a healthy company, never a substitute for one.

Find good businesses. Verify the dividend is covered. Reinvest while you build. Be patient with the snowball.

That is going to wrap up our discussion for today.

As always, thank you for taking the time to read this post, and I hope you find something of value on your investing journey.

If I can further assist, please don’t hesitate to reach out.

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

Dave

You just learned the 6-point checklist I run on every dividend stock before I buy. Paid subscribers get a new company deep-dive every Sunday, the dividend safety calculators, the AI prompts I use to read 10-Ks, and the full infographic library.

Make me a sharper dividend investor

Today I’m sharing the Buy First stocks for your paid subscription.

A complete starter portfolio of five high-quality dividend companies. The names I’d buy first if I were building a dividend portfolio from zero today.

• 📈 2.78% blended forward yield sitting between the S&P 500 and a pure-REIT mix

• 🏆 Five sector-leading businesses with long dividend track records

• 💰 Five different cash-flow engines so the income doesn’t depend on one economic story

• 🔄 The spine you build the rest of your dividend portfolio on for the next year and beyond

Why I built this lineup

Most beginners chase the highest yield they can find. That works until the dividend gets cut. Then it stops working in a hurry.

The smarter move is a small basket of high-quality businesses that pay you today and grow that payment over time.

Five names is enough for real diversification without making the portfolio impossible to track. The five together cover utilities, real estate, insurance, payments, and alternative asset management in one move.

These are the five I'd hand a beginner today. The full lineup, with every yield, payout ratio, and dividend growth track record, is for paid subscribers.

Read more

There is a better first question. How fast can this dividend actually grow, and for how long?

The answer lies in one metric we have discussed before: return on invested capital. ROIC does not just tell you how good a business is. It quietly sets the speed limit on every future dividend raise.

In today’s post, we will discuss:

• What ROIC, payout, and retention actually mean

• The simple formula that predicts a dividend’s growth ceiling

• A full breakdown of Visa, a high-ROIC dividend machine

• Verizon is the mirror image, same math, very different result

• How to run this check on any dividend stock you own

Okay, let’s dive in and learn how ROIC predicts dividend growth.

The one number behind every dividend raise

A dividend is a slice of profit handed back to you. Simple enough.

The part most investors skip is where the next raise comes from. A company can only grow its dividend over time if it grows its earnings over time. And earnings grow when a company reinvests money into the business at a good rate of return.

That rate of return is ROIC.

Return on invested capital (ROIC) measures how much profit a company squeezes out of every dollar of capital put to work in the business. The formula is net operating profit after tax divided by invested capital (the debt and equity funding operations). A 30% ROIC means the company turns one dollar of capital into thirty cents of yearly operating profit.

Two more terms before the trick.

Payout ratio is the share of earnings paid out as dividends. Pay $2 in dividends on $10 of earnings, and the payout ratio is 20%.

Retention ratio is the flip side, the share of earnings the company keeps to reinvest. In that same example, the company keeps $8 of every $10, an 80% retention ratio.

Here is why those two matter together. The money a company keeps is the fuel for growth. The rate it earns on that money is the engine. ROIC is the engine, retention is the fuel.

The trick: ROIC times what a company keeps

Put the engine and the fuel together, and you get a company’s sustainable growth rate:

Sustainable growth = ROIC × retention ratio

That single line predicts how fast a business can grow its earnings, and therefore its dividend, using only its own internal cash. No new stock. No new debt.

Let’s run two quick examples to see the spread.

Company A earns a 30% ROIC and keeps 75% of its profit:

• 0.30 × 0.75 = 22.5% sustainable growth

Company B earns a 7% ROIC and keeps 40% of its profit:

• 0.07 × 0.40 = 2.8% sustainable growth

Same idea, wildly different ceilings. Company A can compound its dividend in the high teens for years while still paying out a quarter of its profit. Company B is stuck near 3% even though it pays out far more than it earns.

Notice the twist. Company A pays out less of its profit, yet its dividend can grow faster. High ROIC is what makes that possible. When the engine is strong enough, a company funds big growth on a small slice of retained earnings and ships the rest to you.

That is the trick. Find a high ROIC paired with room to reinvest, and you have found a dividend that can climb over the long term.

Want to spot a dividend's growth ceiling before the raises arrive? Want the full math instead of the headline yield? Want a new deep dive every month? That is what the paid tier is for.

I want the monthly deep dive

Visa: a high-ROIC dividend machine

Let’s look at Visa (V) as our guinea pig.

Here is Visa’s fiscal 2025 scorecard, taken from its October 28, 2025, earnings release filed on Form 8-K (fiscal year ended September 30, 2025):

• Net revenue: $40.0B (up 11%)

• GAAP net income: $20.1B

• Diluted EPS: $10.20

• Full-year dividends declared: about $2.36 per share

• Payout ratio: roughly 23% ($2.36 / $10.20)

So Visa keeps about 77 cents of every dollar in profit. Now the engine.

Visa runs on a payment network it already built. Each new transaction costs the company almost nothing to process, so profits pile up with little additional capital. Using fiscal 2025 figures, a simplified return on total capital looks like this:

• Net income: $20.1B

• Senior notes (debt): $25.4B (per the fiscal 2025 10-K)

• Total equity: roughly $38–39B

• Return on total capital: about 31% ($20.1B / roughly $64B)

That is a conservative read. It buries Visa’s $20B of cash inside the capital base and treats net income as operating profit. Strip out the idle cash and look at it on a true operating basis, and Visa’s ROIC runs well above that figure. Either way, the engine is enormous.

Now run the trick. With a high ROIC and a 77% retention rate, Visa’s sustainable growth ceiling sits in the high teens. Does reality match?

Here is Visa’s quarterly dividend, as declared each October to set the rate for the year ahead:

• 2020: $0.30

• 2021: $0.375

• 2022: $0.45

• 2023: $0.52

• 2024: $0.59

• 2025: $0.67

That run takes the quarterly payout from $0.30 to $0.67 in five years, more than double, a compound growth rate of roughly 17% a year. The October 2025 raise was 14%, on top of a 13% raise the year before.

High teens predicted. High teens delivered. The trick works.

And Visa is doing all of this while paying out less than a quarter of its profit. That low payout is the signature of a business whose ROIC is so high it can grow fast on a thin slice of retained earnings and send the rest out the door.

Verizon: the same math, a very different ceiling

Now flip it. Let’s look at Verizon (VZ), a favorite of yield hunters.

Verizon yields around 6%, roughly nine times Visa’s yield. On the surface, that looks like the better income stock. Run the trick and a different story shows up.

Here is Verizon’s recent profile:

• Fiscal 2025 net income: about $17.2B

• Diluted EPS: about $4.06

• Payout ratio: roughly 60% of earnings

• Retention ratio: roughly 40%

Verizon keeps far more profit per dollar than Visa does. So why does its dividend barely move? The engine.

Verizon builds and maintains physical networks. Spectrum, towers, fiber, and equipment soak up tens of billions in capital every year. All that capital sits on the balance sheet, and the returns it throws off are modest. Verizon’s ROIC lands in the high single digits, only a touch above its cost of capital.

Plug that into the trick:

• About 7% ROIC × roughly 40% retention = under 3% sustainable growth

Reality matches the math again. Verizon’s dividend history tells the story:

• The September 2025 raise was 1.25 cents a quarter, about 1.8%

• The dividend has grown around 2% a year over the past five years

• 2025 marked its 19th straight annual increase

Nineteen years of raises sounds impressive, and the streak is real. Each raise, though, is tiny. A 2% bump barely keeps pace with inflation, so the purchasing power of that dividend stays close to flat year after year.

Same formula. One business has a high-teens ceiling; the other, a low-single-digit ceiling. The whole gap comes down to ROIC.

How to use this in your own process

You do not need a spreadsheet to run this check. Three numbers and one minute will do.

First, find the payout ratio. Take dividends per share divided by earnings per share. Subtract that from 1 to get the retention ratio.

Second, get a rough ROIC. Many data sources list it. Or build a simplified version yourself: net income divided by the sum of total debt and total equity from the balance sheet. It will read a little low, but it works for a gut check.

Third, multiply ROIC by the retention ratio. That product is the dividend’s growth ceiling.

Then compare what you find:

• A high ceiling (low teens or better) means a dividend that can compound for years. You can accept a lower starting yield because the raises do the heavy lifting.

• A low ceiling (low single digits) means a dividend that mostly stands still. The starting yield is most of what you will ever get from it.

This reframes the whole yield-versus-growth question. A 0.7% yield growing 17% a year eventually overtakes a 6% yield growing 2% a year. It takes patience, and it takes time, but the math is on the side of the high-ROIC compounder.

Where the trick breaks down

The formula is a strong starting point. It does not see the future, though, so a few limits are worth knowing.

ROIC can fade. A company earning 30% today may face new competition that drags returns down tomorrow. The trick assumes the engine keeps running at the same rate, so check whether the moat is durable enough to defend those returns.

Reinvestment opportunities run out. A business can earn a high ROIC and still have nowhere left to deploy capital. When that happens, it usually raises the payout ratio and slows reinvestment. That is a healthy stage of life, just a different one. Buffett’s dream business, See’s Candies, eventually sent almost all of its cash to Berkshire because it could not reinvest those dollars at high rates at home.

Buybacks muddy the picture. Visa spends heavily on repurchases, which shrinks the share count and lifts per-share figures on top of the growth the formula predicts. The trick captures the business engine, not every lever management can pull.

One-time items distort a single year. Use a few years of ROIC and payout, not one snapshot, so a strange quarter does not throw off your read.

The takeaway

A dividend can only grow as fast as the business behind it earns on the capital it reinvests, so multiply ROIC by what a company keeps and you will know the ceiling on those raises long before they ever arrive.

As always, thank you for taking the time to read this post, and I hope you find something of value on your investing journey.

If I can further assist, please don’t hesitate to reach out.

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

Dave

P.S. If you want to keep pressure-testing dividends alongside other patient investors, the paid tier is where the full breakdowns live.

Yes, upgrade me to paid

For dividend investors, the answer matters.

Berkshire is not run as a dividend portfolio. But the cash that flows in from these positions has helped fund every Berkshire move for decades. According to the filing, Berkshire collected over $3 billion in dividends last year from just five stocks. That income stream is the engine behind the buybacks, the acquisitions, and the cash pile.

So when Abel made changes in his first quarter, it told us something. Not about which stocks to buy tomorrow, but about how a disciplined capital allocator thinks about quality, price, and patience.

In today’s post, we will discuss:

• What a 13F is and why dividend investors should read it

• What changed in Berkshire’s Q1 2026 filing

• The dividend stocks Berkshire kept

• The dividend stocks Berkshire trimmed or exited

• What this tells us about building a dividend portfolio

• Common mistakes when copying Berkshire

Okay, let’s dive in and learn what we can pull from this filing.

Before we dig in: if you want filings like this one broken down every month, with the math shown, that is exactly what I send. Free to start.

Yes! Send me the monthly breakdowns

What is a 13F and why does it matter?

A 13F is a quarterly filing the SEC requires from any institutional investment manager with over $100 million in assets under management. It lists their long equity positions as of the end of the quarter.

Berkshire files its about 45 days after quarter end. The Q1 2026 filing covered positions as of March 31, 2026.

Two things matter for dividend investors here.

First, the 13F is backward-looking. Positions may have changed since the snapshot date. So we read it for clues about thinking, not as a buy list.

Second, what stays in the portfolio quarter after quarter often tells us more than what changes. Buffett used to say his favorite holding period was forever. The stocks that survive every quarter for decades are usually the ones with the strongest moats.

That is the lens we want for this filing.

What changed in Q1 2026

The headline numbers from the Q1 2026 13F are clear. Per the Seeking Alpha portfolio tracker:

• Total 13F portfolio value: $263.1 billion (down from $274.2 billion in Q4 2025)

• Number of positions: 26 (down from 40)

• Top five holdings: Apple, American Express, Coca-Cola, Bank of America, Chevron

• Top five concentration: roughly 68% of the portfolio

• Apple alone: about 22% of the portfolio

The big takeaway is concentration. Abel did not blow up the portfolio. He tightened it.

He sold 16 positions entirely and added a handful of new ones. The full list included Amazon, UnitedHealth, Domino’s Pizza, and smaller dividend names such as Constellation Brands, Lamar Advertising, and Diageo. He also continued the wind-down of the Visa and Mastercard positions that Buffett had been trimming.

Abel did not just sell, though. He made one notable buy.

Berkshire increased the Alphabet (GOOGL) position by 225%. This is unusual territory for Berkshire. Buffett famously avoided Google for years and called it one of his bigger mistakes. Abel apparently sees it differently.

He also opened new positions in Delta Air Lines, Lennar, and Macy’s, all classic value plays at discounted prices.

So what does this mean for dividend investors? Look at what stayed.

If reading a 13F this way sharpens your thinking, that is the whole point of Dividend School. Every month I take one company, pull the numbers straight from the filings, and show you the math the way I just did here. I own the stocks I write about. No black box.

Count me in for the monthly deep dive

Try it free. Cancel anytime.

The dividend stocks Berkshire kept

The core of the dividend portfolio is intact. Five names do almost all the work.

Apple (AAPL) is roughly 22% of the portfolio. It pays a modest dividend, but the scale of Berkshire’s position means the dollar dividend is enormous. Buffett called Apple “Berkshire’s third business” for a reason.

American Express (AXP) has been in the portfolio since the 1990s. It has the lowest yield of the group at around 1.1%, but the dividend growth rate is the strongest. Amex earns money from card fees, swipe fees, and net interest on revolving balances.

Coca-Cola (KO) is Berkshire’s longest-held position. According to 24/7 Wall St., the company has raised its dividend for 63 consecutive years. It currently makes up nearly 10% of the portfolio. Buffett bought it in 1988 and has not sold a share.

Bank of America (BAC) is the bet on net interest income at scale. It is Berkshire’s fourth-largest holding. The yield is moderate, but the payout ratio sits in the low 30% range, leaving plenty of room for growth.

Chevron (CVX) is the energy anchor. Per the 24/7 Wall St. report based on the 13F, Berkshire still owns 122 million shares, representing roughly 7% of the portfolio. CVX yields about 4.6% with a 38-year dividend growth streak.

These five names share something in common.

They are all dominant in their categories, generate massive free cash flow, and return that cash to shareholders through dividends and buybacks. Every one of them sits on a moat that has been compounded for decades.

The dividend stocks Berkshire dropped

The exits are where the story gets interesting for income investors.

Abel cleaned out a long list of smaller dividend names. Some of these were high-yield positions that Buffett had added in recent years, including:

• Constellation Brands (STZ): premium beer and spirits, yield around 2.7%

• Lamar Advertising (LAMR): billboards and outdoor advertising, yield around 4.3%

• Diageo (DEO): global spirits brands, yield around 5.0%

• Domino’s Pizza (DPZ): pizza franchise, modest yield with strong growth

• UnitedHealth (UNH): managed care, modest yield with high growth

He also continued reducing the Chevron position from earlier highs and kept trimming Visa and Mastercard, two long-standing payment network holdings.

The pattern is hard to miss.

Abel kept the five biggest, most durable dividend payers. He cut the smaller positions, the recent additions, and the names where the price had probably moved past a comfortable value.

These were not bad businesses. Most of them are excellent companies. But a 13F manager has to deploy capital where the math still works. When a position outgrows its margin of safety, selling becomes part of the discipline.

What this tells us about dividend investing

This is where it gets useful for our own portfolios.

A few lessons jump out of this filing. They are not new ideas, but seeing them play out at the Berkshire scale makes them concrete.

Lesson 1: Concentration is the point.

Most retail investors hold 30, 50, sometimes 100 stocks. Abel runs Berkshire’s stock portfolio with 26 names, and five of them do 68% of the work.

That does not mean you should hold five stocks. But it does mean diluting your best ideas across dozens of mediocre ones probably costs you more than it protects you.

Pick your best dividend ideas, size them appropriately, and let them work.

Lesson 2: Yield is not the goal.

Look at the survivors. American Express yields 1.1%. Apple yields under 1%. Bank of America yields around 2%. Coca-Cola and Chevron sit higher, but none of them are at the top of any high-yield screen.

What every survivor has is durable earnings power. The dividend grows because the business grows. That is the engine.

The names Abel cut include several with much higher current yields. Diageo at 5%, Lamar at 4.3%. He cut them anyway. Yield is a result, not a destination.

Lesson 3: Holding is the hard part.

Coca-Cola has been in Berkshire’s portfolio since 1988. American Express since the mid-1990s. Moody’s for over 20 years.

These returns came from doing nothing for decades. No trading. No timing. Just owning the business and collecting the dividends.

For dividend investors, this is the entire game. We pick well, size right, and then we get out of our own way.

Lesson 4: Selling has a place too.

Abel sold 16 names this quarter. Buffett would have called it cleaning up the desk. The “too hard” pile is real.

When a position no longer fits your thesis or the price runs past your sense of value, selling is part of the process. Holding everything forever is romance. Holding the right things for a long time is investing.

How to use this filing in your own process

When the next 13F drops, here is what I look for:

• Top five concentrations. If the biggest names are still there at meaningful weights, the long-term thesis is intact.

• Net buys and sells in dividend names. Pay attention to direction, not just headlines. A 5% trim is different from a full exit.

• New positions. New names show what the manager finds attractive at current prices.

• Aggregate dividend income. Add up the annualized dividends from the top holdings. That number indicates how much cash flow the portfolio is generating.

Use the 13F as a teaching tool, not a shopping list. The filing is 45 days old by the time you see it. Prices have moved. The manager may have already adjusted again.

Common mistakes when reading a 13F

A few traps to avoid.

Mistake 1: Treating it as a buy list.

The temptation is strong. Berkshire bought Alphabet, so let me go buy Alphabet too. The problem is that the filing is a snapshot from 45 days ago. The position size that worked at $X may not work at $X plus 15%.

Read the filing for ideas. Do your own work on price and position sizing.

Mistake 2: Confusing trims for thesis changes.

Berkshire reduced Chevron meaningfully in Q1, but the position is still 7% of the portfolio. That is not a sale. That is rebalancing.

Watch for full exits, large directional moves, and brand new positions. Those are signals. A small trim is often just portfolio management.

Mistake 3: Ignoring the rest of Berkshire.

The 13F covers only the publicly traded U.S. equity portfolio. It does not show the wholly owned subsidiaries, the cash pile, the bond portfolio, or the international holdings.

Berkshire’s full picture includes BNSF Railway, Geico, See’s Candies, and many more. The stock portfolio is one piece of a much bigger machine.

Mistake 4: Assuming the new CEO will think exactly like the old one.

Buffett would not have bought Alphabet. Abel did. Buffett sold the airlines in 2020 and called it a mistake. Abel just bought Delta.

Greg Abel is his own investor. The 13Fs going forward will show his fingerprints, not Warren’s. That is worth remembering as we watch the portfolio evolve.

Investor takeaway

The Q1 2026 filing is the first chapter of a new era at Berkshire. The five anchor dividend holdings are still there. The smaller, higher-yielding names are mostly gone. The portfolio is more concentrated than it has been in years.

For dividend investors, the message is the same one Buffett has been teaching for fifty years. Own a small number of excellent businesses. Pay a fair price. Hold them long enough for the dividends to compound. Sell when the thesis breaks or the price gets silly.

That is the playbook. It has worked through ten recessions, three financial crises, a pandemic, and a CEO transition. It will probably keep working.

That is going to wrap up our discussion for today.

As always, thank you for taking the time to read this post, and I hope you find something of value on your investing journey.

If I can further assist, please don’t hesitate to reach out.

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

Dave

P.S. If this changed how you read a 13F even a little, that is exactly what Dividend School is for. One full deep dive every month, the math shown, plus the full archive.

Join Dividend School

Try it free, cancel anytime.

P.P.S. Hit reply and tell me one stock you want me to break down next. I read every reply.

A dividend ladder fixes the timing mismatch. Build it right, and you can turn a portfolio of quality businesses into a paycheck that lands in your account every month of the year.

In today’s post, we will discuss:

• What a dividend ladder actually is

• The two ways to build one

• A five-step framework you can use this weekend

• Position sizing math for level monthly income

• The mistakes that wreck most dividend ladders

Okay, let’s dive in and build the ladder.

What a dividend ladder actually is

A dividend ladder is a portfolio structured so dividend payments arrive in every month of the year. Nothing more complicated than that.

The mechanism is simple. Most US companies pay quarterly, but they don’t all pay in the same months. By combining stocks with offset payment schedules, or by adding monthly-paying REITs and BDCs to the mix, you can smooth quarterly lumps into a monthly stream.

Why does this matter?

Three reasons. First, it lets your portfolio income mirror the cadence of your expenses. Second, it gives you cash to reinvest more often, compounding faster through DRIP programs. Third, it forces sector diversification across payment cycles, which is healthy discipline.

The ladder is a structure. Quality of the underlying businesses is still what matters most.

A monthly income stream built from five terrible companies is still terrible income.

US dividend payment cycles

Most US companies fall into one of three quarterly payment cycles. Knowing the cycles is the foundation of the whole approach.

The three cycles look like this:

• Cycle 1: January, April, July, October

• Cycle 2: February, May, August, November

• Cycle 3: March, June, September, December

Familiar names in each cycle:

• Cycle 1: JPMorgan Chase (JPM), General Mills (GIS), PepsiCo (PEP)

• Cycle 2: Procter & Gamble (PG), AbbVie (ABBV), Apple (AAPL)

• Cycle 3: Johnson & Johnson (JNJ), Coca-Cola (KO), Microsoft (MSFT)

A few companies break the mold. Realty Income (O) pays monthly, as do several other REITs and BDCs. Some ADRs pay semi-annually. The three cycles above still cover the vast majority of dividend-paying US companies.

If you own one stock from each cycle, you collect a dividend every single month of the year. That is the basic ladder.

The two ways to build a dividend ladder

There are two paths to monthly income, and most investors use a blend of both.

Path one: offset quarterly payers. Hold three or more dividend stocks across the three cycles. The simplest version is one stock per cycle, but a real ladder usually holds two or three per cycle for diversification and safety. This is the path most retail investors take because it lets them own the high-quality dividend names they already want to own.

Path two: monthly payers. Hold REITs and BDCs that pay monthly by structure. Realty Income (O) is the textbook example, with [109 consecutive quarterly dividend increases as of December 2024, verify current count from latest Realty Income 8-K] and a monthly payment cadence baked into its brand identity. STAG Industrial (STAG), Main Street Capital (MAIN), and Pembina Pipeline (PBA) also pay monthly.

The blended approach is what I prefer. Two or three quality monthly payers anchor the base, then six to nine quarterly payers across the three cycles fill in the rest. You get the smoothing benefit of monthly payers and the deeper bench of quality names from the quarterly group.

If the 3-cycle calendar above is the kind of thinking you want more of, the free newsletter sends one a week. Other patient dividend investors are already there.

Count Me In

The five-step framework

Here is the framework I use to build a dividend ladder from scratch. Five steps, applied in order.

Step 1: Map your income target to dividend yield

Start with the dollar number you want each month. Multiply by 12 for the annual target.

Now divide that annual target by the average yield of your candidate portfolio to find the capital required.

A worked example:

• Monthly income target: $1,000

• Annual income target: $12,000

• Average portfolio yield: 4.0%

• Capital required: $12,000 / 0.04 = $300,000

That math is the reality check. Most investors underestimate how much capital it takes to generate meaningful monthly income at safe yields. A 4% yield is realistic for a quality dividend portfolio. A 7% or 8% yield usually signals either yield traps or higher-risk securities.

Step 2: Screen for dividend quality, not yield

This is the step most investors skip, and it is the reason most dividend ladders blow up over time.

The quality screen looks at five things:

• Payout ratio (free cash flow basis): ideally under 75% for most sectors, under 85% AFFO basis for REITs

• Dividend growth track record: at least 5 consecutive years of increases for non-REITs

• Free cash flow coverage: FCF covers the dividend by at least 1.3x

• Debt: net debt to EBITDA under 3.5x for most sectors, under 6x for REITs

• Earnings stability: revenue and earnings consistent over the last 5 years

A stock yielding 9% with a payout ratio above 100% is not a high-yield gem. It is a dividend cut waiting to happen.

I look at the payout ratio first. If a company is paying out more in dividends than it generates in free cash flow, the gap is funded by debt or asset sales. Neither is sustainable.

Step 3: Pick two to three names per cycle

Once your candidate list is filtered for quality, distribute it across the three payment cycles.

A starter ladder looks something like this:

• Cycle 1 (Jan/Apr/Jul/Oct): one staples name plus one financial

• Cycle 2 (Feb/May/Aug/Nov): one tech name plus one healthcare

• Cycle 3 (Mar/Jun/Sep/Dec): one healthcare plus one consumer

• Monthly payers: one or two REITs or BDCs

The goal of two or three names per cycle is sector diversification. If your Cycle 3 names are all consumer staples, a sector downturn hits a third of your income at once.

Step 4: Size positions for level monthly income

This step is the difference between an amateur dividend ladder and a real one.

The naive approach is equal dollar weighting. Buy $30,000 of each of ten stocks. The problem is that yields differ widely, so equal dollar weights produce uneven monthly income.

The better approach is equal income weighting. Size each position so each stock contributes roughly the same dollar amount per cycle.

Worked example, targeting $250 quarterly per position:

• Stock A yields 3.0%: requires $33,333 ($250 / 0.0075 quarterly rate)

• Stock B yields 5.0%: requires $20,000 ($250 / 0.0125 quarterly rate)

The same target income requires very different capital allocations. Position size to the income you want, not to the share count or dollar amount that feels balanced.

A practical limit is to cap any single position at 5% to 7% of the portfolio. Going above that concentrates risk too tightly on one company. Even the best dividend payers can stumble. AT&T (T) cut its dividend by roughly 47% in 2022 after the WarnerMedia spinoff [verify exact reduction from AT&T 2022 10-K], and that move blew up income for anyone who had over-concentrated in the name.

Step 5: Verify the calendar before you buy

The last step is the one that catches most new dividend investors by surprise.

Ex-dividend date and payment date are different things. If you buy a stock after its ex-dividend date, you do not collect that quarter’s payment.

Always check three dates on each candidate:

• Ex-dividend date: must own shares before this date to collect the next payment

• Record date: the day the company confirms ownership for the dividend

• Payment date: when the cash hits your account

Each company publishes these dates in 8-K filings when they declare a dividend. Investor relations pages list them in plain English.

I keep a simple spreadsheet with the ex-dividend dates for each holding. It takes 10 minutes a quarter to update and saves the occasional missed payment.

A sample 9-stock ladder

Here is what a starter ladder looks like in practice. Yields are placeholders to be verified from the latest declarations on sec.gov.

Cycle 1 (pays Jan/Apr/Jul/Oct):

• JPMorgan Chase (JPM): [Insert current yield from latest dividend 8-K]

• PepsiCo (PEP): [Insert current yield]

Cycle 2 (pays Feb/May/Aug/Nov):

• Procter & Gamble (PG): [Insert current yield]

• AbbVie (ABBV): [Insert current yield]

Cycle 3 (pays Mar/Jun/Sep/Dec):

• Johnson & Johnson (JNJ): [Insert current yield]

• Microsoft (MSFT): [Insert current yield]

• Coca-Cola (KO): [Insert current yield]

Monthly payers:

• Realty Income (O): [Insert current yield]

• Main Street Capital (MAIN): [Insert current yield]

That mix gives you nine income streams across eight sectors, hitting your account every single month.

Common mistakes that wreck dividend ladders

Three mistakes show up over and over in dividend ladder portfolios. Watch for them.

Chasing yield. A 9% yield is rarely a gift. More often it signals the market expects a cut, or the underlying business is in trouble. Annaly Capital Management (NLY), an mREIT, has cut its dividend multiple times over the past decade despite a long history of high reported yields [verify cut history from NLY 10-K filings]. Yield is the reward for risk. Always check the risk first.

Ignoring the right payout ratio. Net income payout ratios are easy to find but often misleading. For REITs, you want AFFO payout ratios. For regular companies, free cash flow payout ratios. Net income includes non-cash items that distort the picture. A 60% net income payout might be 110% on a free cash flow basis if capex is high.

Treating monthly income as the goal. Monthly income is the structure. Quality compounding is the goal. A ladder of average businesses delivering monthly checks will underperform a ladder of great businesses delivering quarterly checks every time. Sequence and timing matter less than the durability of the underlying dividends.

A quick checklist before you build

Save this and run through it before every buy:

• Annual income target identified, capital required calculated

• Average portfolio yield is realistic (3% to 5% for quality, not 8%+)

• Each candidate passes the 5-point quality screen

• Position sizes set for level income, not equal dollar weights

• Sector diversification across the three cycles

• Ex-dividend dates and payment dates verified for each holding

• No single position above 5% to 7% of portfolio

Final thoughts

A dividend ladder is a tool. The strategy is owning quality businesses that grow their dividends over time. The ladder is the structure that makes the income arrive when you need it.

Built with the five-step framework above, a ladder turns the lumpy quarterly cadence of US dividend culture into something that matches the monthly cadence of real life. That makes the income easier to use, easier to reinvest, and easier to live on.

That is going to wrap up our discussion for today.

As always, thank you for taking the time to read this post, and I hope you find something of value on your investing journey.

If I can further assist, please don’t hesitate to reach out.

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

Dave

P.S. Before Dividend School opens on June 1, I am going live to show you what is inside and answer every question you have. I will walk through how I would build a dividend portfolio from scratch, in real time. June 4th @ 11 am EDT