In 2025, Safety Net was once again an excellent resource for evaluating the safety of a company’s dividend.

During the year, 10 stocks were rated “A” for dividend safety. None of them cut their dividends. In fact, since 2023, not one of the 29 “A”-rated stocks has lowered its payout within a year after we evaluated it.

Even more impressive, 50% of 2025’s “A”-rated stocks boosted their dividends during the year, including Iron Mountain (NYSE: IRM), which raised its dividend by 10% six months after my “A” rating was released, Delek Logistics Partners (NYSE: DKL), which raised its distribution each quarter, and MPLX (NYSE: MPLX), which hiked its payout by 12% less than a week after I gave it an “A” rating.

I only gave four stocks a “B” for dividend safety in 2025, but two of them boosted their dividends, while the other two kept them the same. There were no cuts.

Energy Transfer (NYSE: ET) was rated “B” in April and raised its distribution every quarter in 2025.

There were seven stocks whose dividends were considered to have a moderate risk of being cut, receiving a “C” rating. Two raised their dividends; two cut them. The average change to the dividend of those seven stocks was -10.6%.

There were a handful of cuts among the “D” and “F”-rated stocks as well. We gave 12 stocks a “D” grade, and 17 others were rated “F.” Two out of the 12 “D”s lowered their dividends, while three out of the 17 “F”s did so.

“D”-rated stocks had the biggest average drop at 12.4%. “F”-rated stocks only saw a 6.4% average decline, but that number is skewed a bit by one variable dividend that saw a sizable – yet likely temporary – increase.

Back in February, Stellantis (NYSE: STLA) slashed its dividend by more than 50% a week after I issued a “D” rating on the stock.

Advanced Flower Capital’s (Nasdaq: AFCG) dividend wilted in 2025. After I gave it a “D” rating, management proved me right by cutting the dividend twice and then skipping it altogether in the fourth quarter.

In June, Research Analyst John Oravec said there was a strong likelihood that OFS Capital (Nasdaq: OFS) would “have a repeat of 2020 with a cut coming down the line” before slapping the stock with an “F” rating. The dividend was cut in half in December.

All in all, it was another terrific year for Safety Net.

Thanks to all of you who submitted requests for stocks to be evaluated in the Safety Net column. Keep them coming! Leave the ticker symbols in the comments section below.

You can also check to see if I’ve rated your favorite dividend payer recently. Just type the company name in the search box in the upper-right corner of this page, and hit “enter.”

The post Safety Net: The Great Dividend Predictor appeared first on Wealthy Retirement.

I’m talking about free cash flow-to-enterprise value, or FCF/EV.

It’s not a flashy metric. You won’t hear it tossed around on financial TV or splashed across brokerage reports. But it’s the number that tells us, more than any other, whether we’re looking at a genuine bargain or a value trap.

It’s also why The Value Meter so often spots cash-rich, underpriced businesses that others miss.

Free cash flow is the cash a company has left over after paying its bills and maintaining its business. It’s the real money that can be used to pay dividends, buy back stock, or reduce debt.

Enterprise value, on the other hand, represents what it would cost to buy the whole company – equity, debt, and all – while subtracting cash.

When we divide one by the other, we find out how much cash a business produces for every dollar it would cost to own it outright.

That’s why FCF/EV is the truest “earnings yield” there is. It ignores accounting games, one-time gains, and headline noise. It’s the simplest measure of what really matters: how efficiently a company converts its resources into spendable dollars.

This isn’t a theory we dreamed up in isolation, by the way. Some of the biggest and most disciplined investors in the world rely on this same approach.

AQR Capital, a quantitative giant managing more than $100 billion, includes free cash flow-to-enterprise value as a core factor in its long-term value strategies. AQR’s research shows that companies with high FCF/EV consistently outperform those with low FCF/EV, even after adjusting for size, leverage, and industry.

S&P Dow Jones has also leaned into this principle. In 2024, it launched the S&P Quality Free Cash Flow Aristocrats Index, which screens for companies that generate strong and stable cash flows relative to their assets.

The results speak for themselves. These stocks have shown greater resilience during market drawdowns and stronger returns over full cycles.

Meanwhile, investors can see the power of this metric in real-world performance. The Pacer U.S. Cash Cows 100 ETF (BATS: COWZ), which ranks companies purely by FCF/EV (also called FCF yield), has beaten the Russell 1000 Value Index by roughly seven percentage points per year over the past five years.

That’s not luck. That’s free cash flow doing its job by identifying businesses that generate real money relative to what they cost.

Traditional measures like price-to-earnings or price-to-book simply can’t compete. Earnings can be massaged with creative accounting, and book value has lost its meaning in a world where the most valuable assets – software, patents, and brands – don’t appear on a balance sheet.

Cash is unambiguous. It doesn’t need interpretation.

When a company consistently produces more free cash than its peers for every dollar of enterprise value, it’s usually because it runs a better business, not because of financial smoke and mirrors.

This is why FCF/EV sits at the heart of The Value Meter.

The other metrics we use – free cash flow-to-net asset value and enterprise value-to-net asset value – tell us how efficiently a business converts its assets into cash and how expensive those assets have become. But FCF/EV ties it all together. It’s the ratio that tells us what we’re paying for the company’s ability to produce real, recurring cash. It’s our “truth serum.”

The takeaway is simple: In a market full of noise, cash flow remains the one number that can’t be faked. It’s the most direct signal of whether a business truly earns more than it spends.

That’s why free cash flow-to-enterprise value isn’t just another ratio – it’s the cornerstone of how we find genuine value. And it’s why it will stay at the center of The Value Meter long after price-to-earnings ratios are no longer relevant.

The post The Valuation Metric That Beats All Others appeared first on Wealthy Retirement.

Chief Income Strategist Marc Lichtenfeld is a huge fan of companies with strong and growing cash flow. Anyone who’s spent just a few minutes around him knows that.

If you think I’m exaggerating… think again.

Marc recently told me a story about a salesman coming to his house to sell a certain company’s products. When Marc heard the name of the company, he replied, “Oh, I’ve heard of it. Great company. Generates a ton of cash flow.”

(The salesman, of course, wasn’t sure how to respond.)

Last week, Marc sat down for an interview with our friends at MarketBeat to discuss why investors should pay much more attention to cash flow than earnings.

He also gave away the names and tickers of two potential diamonds in the rough to buy now and two “ticking time bomb” stocks to avoid:

• An established drugmaker whose free cash flow is projected to triple this year
• An under-the-radar way to get exposure to the AI space
• A household name (literally) that has been bleeding billions of dollars for the past decade
• A company that he says is “complete garbage” and whose earnings are “a joke”!

Click the image above to watch the full interview and get the details on all four stocks!

The post 2 Stocks to Buy That Are Swimming in Cash appeared first on Wealthy Retirement.

When I was growing up, it wasn’t just a store – it was the place my family went for back-to-school shopping, for new dress shirts before church, and for the Thanksgiving parade on TV. Even today, I find myself browsing its racks more often than I care to admit.

It’s one of those rare retailers that still feels familiar, even as the world of shopping has shifted online.

But sentiment and nostalgia don’t keep a business alive. Numbers do. And as I noted when I evaluated the stock last November, Macy’s has spent the past few years trying to prove that department stores aren’t relics of the past.

Macy’s isn’t just the red-star brand we all know. It’s a three-nameplate company, with Macy’s, Bloomingdale’s, and Bluemercury under its roof. Together, they span everything from affordable apparel to luxury handbags to high-end skincare.

Management’s “Bold New Chapter” strategy is focused on trimming underperforming stores, reinvesting in digital, and giving prime real estate a facelift under the “Reimagine 125” program. The company’s goal is to modernize the core Macy’s fleet while leaning into higher-growth banners like Bloomingdale’s and Bluemercury.

The second quarter of 2025 brought some progress. Net sales came in at $4.8 billion, topping guidance, with comparable sales up 0.8% at company-owned stores and 1.9% including licensed and marketplace sales.

Bloomingdale’s continues to shine, posting 3.6% comparable sales growth on an owned basis and 5.7% including licensed and marketplace sales, marking its fourth straight quarter of gains. Bluemercury notched its 18th consecutive quarter of growth at 1.2%. Even the 125 “reimagined” Macy’s stores managed 1.1% comparable owned growth, outpacing the broader chain.

The company’s earnings were mixed. Adjusted earnings per share came in at $0.41, which beat guidance but was down from $0.53 last year. Gross margins slipped 80 basis points to 39.7% due to markdowns and tariffs. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) landed at $393 million and 7.9% of revenue, both of which were down from a year ago.

Cash flow was light. For the first half of 2025, Macy’s generated $255 million in operating cash flow, but after capital expenditures and software investments, free cash flow was -$13 million. That’s a worrying sign for a company that needs cash to both reinvent itself and pay shareholders.

Speaking of which, Macy’s did still return capital. The board declared a dividend of $0.1824 per share and bought back $50 million worth of stock last quarter, bringing its total to $151 million worth repurchased year to date. The balance sheet also looks healthier after the company trimmed long-term debt by about $340 million and pushed major maturities out to 2030.

When we run Macy’s through The Value Meter, the picture continues to look nuanced.

Macy’s EV/NAV ratio comes in at 2.04, far cheaper than the universe average of 6.53. In plain English, you’re paying less than one-third the “going rate” for Macy’s assets compared with the average company. That makes it look attractively priced from a balance sheet perspective.

Despite a choppy year for retail, Macy’s is still generating cash. Its FCF/NAV sits at 4.33%, compared with a universe average of -2.04%. That means Macy’s is producing real cash relative to its resources, while many peers are burning through theirs. That efficiency gives it some breathing room to invest, buy back stock, or pay dividends.

The weaker spot in Macy’s profile is consistency. Over the past three years, it grew its quarterly free cash flow just 36.4% of the time, below the universe average of 46.2%. Put differently, Macy’s has produced positive quarters – but not as steadily as investors would like. Retail cycles, tariffs, and markdowns still make this cash machine sputter from time to time.

Overall, Macy’s balances out. Its cheap valuation offsets its uneven cash flow history.

But over the past year, shares have been on a roller coaster.

After peaking above $20 early in 2024 and at over $17 late in the year, the stock tumbled below $10 in April before staging a modest recovery. Now, after the sharp post-earnings spike, Macy’s trades near $17 – still well off its highs but up more than 40% from its spring lows.

Macy’s is doing many of the right things: closing underperforming stores, refreshing prime locations, and leaning into growth banners like Bloomingdale’s and Bluemercury. But the challenges are just as clear.

The Value Meter rates Macy’s as “Appropriately Valued.”

What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.

The post Macy’s: An Iconic Retailer That’s Still Going Strong appeared first on Wealthy Retirement.

Those were the strong, harsh words my father uttered when I couldn’t find the strength to walk up the steep mountain near my grandparents’ home in Yauco, Puerto Rico – the same mountain my mother swore she climbed every day as a little girl to get to school.

I had to stop every three minutes. My father, a lifelong athlete and former marathon runner, saw my struggle as an embarrassment. In his own way, I think he meant to motivate me. Instead, he lit a fire.

I was angry. I was offended. But I was also determined to prove him wrong.

The next day, we made the same 30-minute trek to the top of the mountain. This time, I popped in my headphones – tuning out my dad’s voice – and pushed forward without stopping once. I even made the walk back down without taking a single break.

“I sure showed him,” I thought.

Looking back now, I realize that it was he who showed me.

He showed me I was capable of more than I believed. I didn’t need weeks of training. I just needed resolve – a decision to stop being lazy, to stop holding back.

In the words of Napoleon Hill, “Effort only fully releases its reward after a person refuses to quit.”

That lesson stuck with me.

I try not to measure my worth by what I can do right now. I focus on what’s possible – on the good I can do if I commit fully. That mindset has shaped how I live, how I work, and how I invest.

It’s also how I approach this column.

The Value Meter was never meant to be a finished product. It’s evolved over time, becoming more objective, more robust, and more useful to everyday investors.

Today, I’m proud to officially introduce version 3.0 of The Value Meter.

At its core, the mission is the same: to help you quickly gauge whether a stock is undervalued, overvalued, or fairly priced based on real business fundamentals.

But this latest version includes three important upgrades:

These changes make the system smarter and sharper, but it will still be grounded in the same common-sense approach that’s made value investing so powerful for generations. (It’s also shifting from a six-point scale to a 10-point scale, with 0 being the most undervalued and 10 being the most overvalued.)

Let’s take the upgraded Value Meter for a spin.

Today’s featured company is one that embodies long-term discipline and durable strategy.

Deere & Company (NYSE: DE) is the world’s leading manufacturer of agricultural and construction equipment. From John Deere’s first steel plow, forged in 1837, to today’s precision agriculture technology, this Illinois-based giant has consistently evolved to meet changing needs.

The financial picture tells a story of resilience during challenging times.

In the second quarter, net sales dropped 16% to $12.8 billion year over year. Net income fell 24% to $1.8 billion, or $6.64 per diluted share. Large agricultural equipment demand declined roughly 30% in the U.S. and Canada.

Despite these headwinds, Deere maintained an 18.8% operating margin for equipment operations. The company produced $568 million in operating cash flow during the first six months of fiscal 2025 even as revenue fell 22%.

Deere faces additional pressure from tariffs, as it expects over $500 million in pretax impact for fiscal 2025. However, the company holds nearly $8 billion in cash and equivalents, which provides substantial financial flexibility and helps fund its 1.3% dividend yield.

The stock has reflected these mixed signals. After peaking near $430 in mid-2023, shares tumbled to around $340 over the next year before rising to current levels around $500.

Let’s see what the new and improved Value Meter tells us about Deere’s true worth.

The company’s enterprise value-to-net asset value ratio (EV/NAV) of 5.92 means you’re paying roughly $6 for every dollar of business assets left over after covering the liabilities. With the average EV/NAV sitting at 12.32, Deere is trading at less than half the typical premium.

Deere excels in cash-efficiency, with a free cash flow-to-net asset value (FCF/NAV) of 4.02%. This means the company generates over $4 in free cash flow for every $100 in net assets. Compare that with the broad market average of -26.98%, and you’re looking at a rare cash-generating machine.

Over the past three years, Deere’s free cash flow has grown quarter over quarter nearly 64% of the time, compared with the 47.58% average.

This isn’t a company that’s coasting on past success. Deere is using this downturn to strengthen its competitive position. It is investing $20 billion over the next decade in U.S. manufacturing and technology development. That will help it continue to create innovations like its See & Spray precision technology, which covered 1 million acres in 2024 and already has 1,000 new orders this year.

Digital engagement metrics tell the story. Engaged acres (the number of acres that are accounted for in the company’s online farm management system) grew 15% to 475 million, creating sticky, high-margin software revenue that compounds over time.

Of course, it won’t be smooth sailing ahead. Agricultural cycles can last years, and tariff uncertainty adds complexity.

But for patient investors, temporary problems often create the best opportunities.

The Value Meter rates Deere & Company as “Slightly Undervalued.”

What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.

The post John Deere: A Cash Machine Hidden in Plain Sight? appeared first on Wealthy Retirement.

Yet some of the world’s most successful investors swear by it.

It’s also one of the few investment strategies grounded in sheer common sense. The core of value investing is simple: Buy shares of a solid business for less than they’re really worth.

Not only does this minimize downside risk, but as the market eventually recognizes the company’s true value, patient investors can reap handsome rewards.

But just because it’s simple doesn’t mean it’s easy.

Successful value investing requires independent thinking, meticulous research, and the discipline to tune out the crowd. That’s why having a clear, objective framework is critical in identifying genuine bargains amid the market’s noise.

Since taking the helm of Wealthy Retirement‘s Value Meter column, I’ve sought to help readers better gauge whether stocks are overvalued or undervalued in a way that isn’t endlessly complicated.

The father of value investing, Ben Graham, believed financial analysis should be simple, requiring no more than basic arithmetic. While the system behind The Value Meter uses a tad bit more than arithmetic, it does aim to be simple. In fact, it’s based on only three key metrics.

The Value Meter Criteria

The first metric gets to the heart of what makes a good business: the ability to generate profits. But what’s the best measure of profitability?

Reported earnings can be misleading. Massive one-time gains, shifting accounting policies, and management trickery can all distort a company’s true profitability. That’s why most value investors insist on following the cash.

Free cash flow is the primary (but not only) measure of profitability I look at. It represents the cash a company generates after subtracting operating expenses and capital expenditures.

Steady cash flow is the lifeblood of any business because it allows the company to fuel growth, reduce debt, and reward shareholders.

After I determine a company’s free cash flow, I like to compare it with the company’s net asset value, or NAV − the difference between its assets and its liabilities. This allows me to assess how efficiently the company is using its resources to generate cash.

The higher the ratio of free cash flow to NAV, the better.

For example, let’s say Company ABC and Company DEF both have $10 billion in net assets, but Company ABC brings in $40 billion in free cash flow while Company DEF brings in just $20 billion. This means Company ABC is twice as efficient as Company DEF at turning its assets into cash.

Once I’ve calculated this ratio over each of the past four quarters, I’m able to see where the company ranks among the roughly 6,000 U.S. exchange-traded stocks in my database.

The third key metric is the hypothetical cost of acquiring the entire business, also known as its enterprise value, or EV. Unlike market cap, EV accounts for a company’s total acquisition cost, including both equity and debt.

Just as I do with free cash flow, I compare each company’s EV with its NAV. A low EV/NAV ratio suggests that you’re paying relatively little to acquire the company – a hallmark of an undervalued stock. So the lower the figure, the better.

Lastly, I score each company by averaging its ranking for each measurement and using basic statistical analysis to assign it a rating on a scale from 0 to 6.

Those scores correspond to five different categories: “Extremely Undervalued,” “Slightly Undervalued,” “Appropriately Valued,” “Slightly Overvalued,” and “Extremely Overvalued.”

At the bottom of each of my Value Meter columns, you’ll find all of this information compiled into a simple graphic. Here’s an example:

Overall, my Value Meter system favors companies that are producing high levels of cash relative to their net assets while trading at low EVs relative to their net assets. If a company ranks well in both categories, that indicates that it’s both more efficient and cheaper than its peers.

Now, admittedly, my system isn’t perfect.

It clearly prefers asset-heavy companies with ample free cash flows, which are typically mature companies rather than those in the early growth phase.

As a result, it tends to not give positive ratings to fast-growing businesses that are light on capital, some of which turn out to be phenomenal investments. Most growth-focused investors would consider that a huge flaw.

But for anyone seeking a straightforward way to identify potentially mispriced companies, The Value Meter offers a solid start. Its unwavering focus on cash generation and asset value can help investors stay grounded.

Value investing is not the only way to build wealth in the markets, but it has proved its merits over many decades. The Value Meter’s aim is to make this timeless strategy more accessible than ever.

If you have any questions about my Value Meter system (or if you have any stocks that you’d like me to run through The Value Meter), feel free to post them in the comments section below.

The post The Value Meter: Using Common Sense to Find Bargain Stocks appeared first on Wealthy Retirement.

Before we get to this week’s Safety Net, I’d like to briefly address the presidential election and some other upcoming news.

The market ripped higher this morning due to Donald Trump’s victory. Bond yields spiked as well.

We’ll also receive the Fed’s latest decision on interest rates tomorrow afternoon. It is expected that the central bank will lower rates by 25 basis points, or a quarter of a percentage point.

There are a lot of factors to take into account in trying to determine which way the market will move going forward. You shouldn’t put too much weight on today’s action. The market is likely blowing off a lot of worry about a number of things, including Vice President Kamala Harris’ plan to raise corporate taxes if she had been elected and the possibility of a protracted election in which no winner was declared.

The best thing you can do during volatile times like this is to sit back and wait for things to settle down. It’s usually not a good idea to react when the market has a big move on a news event, as there is potential for whipsaws.

One positive for dividend investors is that lower corporate taxes should mean that companies’ free cash flow will increase, which will help them pay and hopefully raise their dividends.

As always, Wealthy Retirement will continue to keep you apprised of the latest news and how it could affect your portfolio, so keep an eye on your inbox in the weeks and months ahead.

In 2021, I compared Nordic American Tankers (NYSE: NAT) to a crazy friend who you could either have the time of your life with or could get you arrested.

The problem with the shipping company’s dividend safety was that its dividend and free cash flow were as consistent as a contractor’s estimate for when your kitchen will be finished.

Since 2021, some things have improved. Free cash flow turned positive in 2022, grew in 2023, and is expected to nearly double this year.

However, there’s still a big problem: Last year, the company paid out 136% of its free cash flow in dividends. In other words, it could not afford the dividend it paid to shareholders.

This year, Nordic American Tankers is forecast to pay shareholders 77% of its free cash flow, which is a big improvement over 136% but still a little too high. Generally, I like to see payout ratios below 75% in order to feel comfortable that the company could afford its dividend even if cash flow were to come in below expectations or fall the following year.

Then there’s the issue of the dividend. In each of the past three quarters, the company has paid out $0.12 per share, which comes out to a tasty 15% yield on the stock’s current price. But over the long term, the dividend is all over the place, like the demands of a tired 3-year-old.

To be fair, Nordic American Tankers’ management team isn’t schizophrenic when it comes to the dividend. The company simply has a variable policy that states that the dividend is based on the previous quarter’s net operating cash flow.

A company with a variable dividend always has a high risk of a dividend cut. In this case, that policy means any decline in cash flow will result in a lower dividend for the following quarter.

All in all, things are certainly better now than they were when I last reviewed the stock in 2021. Cash flow and the dividend have both increased. The likelihood of a dividend cut remains very high, though, which is not surprising for a stock that yields greater than 15%.

Dividend Safety Rating: F

What stock’s dividend safety would you like me to analyze next? Leave the ticker in the comments section.

You can also take a look to see whether we’ve written about your favorite stock recently. Just click on the word “Search” at the top right part of the Wealthy Retirement homepage, type in the company name and hit “Enter.”

Also, keep in mind that Safety Net can analyze only individual stocks, not exchange-traded funds, mutual funds or closed-end funds.

The post The Ship Has Sailed for This Shipping Company’s Dividend appeared first on Wealthy Retirement.

Today, in the spirit of “teaching a man to fish,” I’m taking you behind the scenes to show you exactly how I determine the safety of a company’s dividend.

As far as I can remember, I’ve never outlined my full Safety Net criteria before, so I’m eager to share the details with you.

The first thing I look at is free cash flow.

I focus on free cash flow rather than earnings because earnings include all kinds of non-cash items and are easily manipulated.

For example, earnings can include revenue that has been recognized but not received. Let’s say a company books a $1 million sale on December 29. Those funds would count toward the company’s revenue for the year, and that revenue would then trickle down the income statement, with a portion of it being added to earnings.

However, the company sends the invoice on December 30 and, as of December 31, has not been paid.

That $1 million still counts toward the year-end revenue and earnings totals, but it won’t be reflected in free cash flow because the company has not received the money yet.

Another example is stock-based compensation. When a company grants stock to employees, it is counted as an expense that lowers earnings. But no cash went out the door, so it doesn’t affect cash flow.

In short, cash flow is how much cash the company actually brought in (or sent out).

When it comes to evaluating the safety of a company’s dividend, we want to see that the cash the company generated is enough to cover the dividend. That’s because dividends are paid in cash, not in “earnings.”

The best way to determine whether the cash is sufficient to cover the dividend is by calculating the company’s payout ratio, or the percentage of its free cash flow that it pays out in dividends. (Most people use earnings to calculate payout ratio, but I prefer free cash flow for the reasons I explained above.)

We calculate free cash flow by going to a company’s statement of cash flows and subtracting its capital expenditures from its cash flow from operations.

Below is McDonald’s‘ (NYSE: MCD) statement of cash flows from its 2023 annual filing with the SEC.

The key numbers we’re looking at are cash provided by operations, capital expenditures, and common stock dividends.

You can see that cash flow from operations was $9.612 billion and capital expenditures (sometimes known as “capex”) were $2.357 billion. To arrive at our free cash flow figure, we subtract capex from cash flow from operations. McDonald’s’ free cash flow comes out to $7.255 billion.

Then we look at common stock dividends, which totaled $4.533 billion.

This tells us that McDonald’s paid out $4.533 billion out of the $7.255 billion that it generated in cash. That’s a payout ratio of 62%.

If we’d used the $8.469 billion earnings figure (shown in the “net income” row at the top of the page) to determine the payout ratio, the payout ratio would’ve been 54%.

But remember, dividends must be paid in cash, so we’re not interested in what percentage of earnings the company paid out in dividends. We need to know what percentage of its cash was paid out in dividends.

In Safety Net, my payout ratio threshold for most companies is 75%. If the payout ratio is above 75%, I no longer have confidence that the company could afford its dividend if it were to hit a rough patch or its cash flow were to decline. But if the payout ratio is below 75%, the company has a decent buffer to protect it if it has a bad year.

However, there are some exceptions to my 75% rule. I allow real estate investment trusts (REITs), business development companies (BDCs), and partnerships to have payout ratios of up to 100% because they are legally required to pay out 90% of their earnings. For that reason, they usually have higher payout ratios than other companies.

Also, we use a different measure of cash flow for these types of companies. For REITs, we use funds from operations (FFO), for partnerships, we use distributable cash flow (DCF), and for BDCs, we usually use net investment income (NII). For banks and mortgage REITs, we use net interest income.

When I’m determining my Safety Net grades, every stock starts out with an “A” rating and then gets downgraded depending on several factors.

Safety Net looks at both the previous year’s payout ratio and the current year’s expected payout ratio. The stock gets downgraded for each one that’s above 75% (or 100% for REITs, BDCs, and partnerships).

This year, McDonald’s’ payout ratio is forecast to drop from 62% to 53%, which is still well below my threshold.

I also look at cash flow growth. If cash flow has declined over the past year or past three years or is expected to fall in the current year, the stock’s safety rating will be downgraded.

McDonald’s had a big jump in free cash flow in 2023, so its one- and three-year growth rates were positive. Free cash flow is forecast to increase this year as well.

Lastly, we look at the company’s dividend-paying track record over the last 10 years. For each dividend cut in that span, the dividend safety rating gets downgraded by one level. If the company has raised its dividend in each of the last 10 years, it will get a one-level upgrade, because that tells me that management is committed to sustaining the dividend even if the financials get troublesome.

McDonald’s has no dividend cuts in the past 10 years. In fact, it has raised the dividend every year for the past 49 years, so it gets a bonus point.

To sum it up, each stock begins with an “A” rating and a score of 0, but its grade is adjusted based on the following factors:

• Previous year’s payout ratio above 75% (or 100% for REITs, BDCS, and partnerships): -1
• Current year’s expected payout ratio above 75% (or 100% for REITs, BDCS, and partnerships): -1
• Negative cash flow growth over the past year: -1
• Negative cash flow growth over the past three years: -1
• Negative expected cash flow growth over the next year: -1
• Dividend cut within the past 10 years: -1 per cut
• 10 years of consecutive dividend increases: +1.

If the company ends up with a score of 0 or 1, it gets an “A.” If its score is -1, it gets a “B.” A score of -2 earns a “C” grade, a score of -3 gets a “D,” and a score of -4 or below gets an “F.”

McDonald’s’ payout ratio was within my comfort zone last year and should remain there, its free cash flow has been growing and is expected to continue growing this year, and it has no history of dividend cuts in the past 10 years.

With no downgrades, the stock gets an “A” for dividend safety.

Now you know how the Safety Net sausage – or, in this case, Sausage McMuffin – is made. But feel free to continue letting me know what stocks you’d like me to analyze here in Safety Net. Just leave the ticker symbols in the comments section below.

Dividend Safety Rating: A

The post The Safety Net System: How I Evaluate Companies’ Dividends appeared first on Wealthy Retirement.

This disruptive startup manufactures electric trucks, SUVs, and delivery vans with innovative designs and an eco-friendly focus.

The stock’s journey has been as electrifying as its vehicles. After debuting at $78 per share in November 2021, it skyrocketed to nearly $180 within days.

But the honeymoon was short-lived. As a broader tech sell-off took hold and investors scrutinized Rivian’s fundamentals, the share price plummeted.

Over the past year, the stock has been bouncing between $10 and $25, a far cry from its lofty IPO levels.

But might now be the time for investors to bet big on the stock?

Let’s run the numbers through The Value Meter to find out.

Rivian’s enterprise value-to-net asset value (EV/NAV) ratio is a very low 1.59. That’s significantly below the average of 10.95 for companies with positive net assets, which seemingly suggests an extreme bargain.

Not so fast, though… Rivian’s cash burn is a real concern.

The company has churned out negative free cash flow in each of the past four quarters, with its free cash flow averaging -13.87% of its net assets during that span. That’s a bit better than the -18.11% average for firms with similarly poor cash flow, but it’s still a significant drain.

Revenue came in at $1.16 billion in the second quarter of 2024, driven by the delivery of 13,790 vehicles. But the company reported a net loss of $1.46 billion during the quarter – even worse than the $1.20 billion loss it reported over the same period last year.

Clearly, Rivian is still far from profitability.

However, it is making strides in production efficiency. The company recently completed a retooling upgrade at its plant in Normal, Illinois, which is expected to increase production line rates by 30%.

Rivian has also introduced its second-generation R1 vehicles, which feature improved performance and lower production costs.

The company’s partnership with Volkswagen is another potential game changer. This joint venture has a total deal size of up to $5 billion and could accelerate software development and reduce costs through economies of scale.

Lastly, Rivian’s cash position remains strong, with $7.9 billion in cash and equivalents as of the end of the second quarter. This should provide a sufficient runway to fund the company’s operations through the launch of its R2 platform in 2026, a crucial milestone for its growth plans.

But while the company has made progress and boasts innovative products, the ongoing losses and uncertain path to profitability justify a cautious stance.

The further we look beyond Rivian’s seemingly low EV/NAV ratio, the less appealing the stock becomes. At current prices, it’s hardly a bargain.

The Value Meter rates Rivian as “Slightly Overvalued.”

What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.

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Additionally, after a 150% dividend increase in 2022, the company’s payout ratio was over 900%! That means it was paying an astonishing $9 in dividends for every $1 in free cash flow. That’s as unsustainable as it gets.

Let’s see whether Spok has improved its ability to pay its dividend since last November.

Spok’s free cash flow has grown meaningfully in 2023 and 2024, rising from just $2.7 million in 2022 to $22.8 million last year and an expected $26.5 million this year. So the company is already in much better financial shape.

However, Spok’s total dividend payout is forecast to rise from $25.6 million in 2023 to $30.4 million in 2024, so it is likely still paying shareholders more than it’s taking in.

Interestingly, management acknowledges that the company can’t afford its dividend. During Spok’s second quarter conference call, CEO Vince Kelly stated, “Our cash flow is on a path to grow into our current dividend level and cover it in full on an annual basis.”

That’s why Wall Street’s $30.4 million estimate for Spok’s total dividend payout in 2024 doesn’t make sense to me. Analysts are clearly expecting Spok to boost the dividend this year… but if the CEO himself acknowledges that the company isn’t generating enough cash to afford its current dividend, why would it raise the dividend even further? That would be very irresponsible.

(That being said, management has already been paying a dividend it can’t afford, so it’s possible the analysts will be correct.)

If Spok simply maintains its $0.3125 per share quarterly dividend, which equates to a generous 8.5% yield, it will pay shareholders $25.6 million this year. That would be just below the amount of free cash flow the company is forecast to bring in.

But even if that happens, the payout ratio would still be too high at 97%, so that wouldn’t help the company’s dividend safety rating.

Lastly, Spok has no debt, which is a positive, as it means the company is not draining cash to pay interest on debt. But with only $23.9 million in cash in the bank, it doesn’t have a big buffer between its free cash flow and the amount of cash it needs in order to fund the dividend at current levels.

The bottom line is Spok can’t afford its dividend right now, but that may be changing soon.

At this time, you can’t consider the dividend safe. However, it’s in much better shape than it was last year.

Dividend Safety Rating: C

What stock’s dividend safety would you like me to analyze next? Leave the ticker in the comments section.

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Also, keep in mind that Safety Net can analyze only individual stocks, not exchange-traded funds, mutual funds or closed-end funds.

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