The Dividend Safety Score

Could a score be created to assess the security of a company's dividend?

For example, something like this, by applying the following formula:

The Dividend Safety Score Formula

(0-100) \(DDS=(0.35\times P)+(0.40\times F)+(0.15\times D)+(0.10\times H)\)

Where each variable is scored from 1 to 100 as follows:

1. Earnings Payout Ratio (\(P\)) - Weight: 35% 
Measures the prudence of the dividend policy. 
If Payout is 0% to 50%: 100 points.
If Payout is 51% to 75%: 70 points.
If Payout is 76% to 90%: 40 points.
If Payout is > 90% or negative: 0 points.

 2. Free Cash Flow (FCF) Payout (\(F\)) - Weight: 40% 
This is the most critical factor as it measures actual available cash.
If FCF Payout is < 60%: 100 points.
If FCF Payout is 60% to 80%: 60 points.
If FCF Payout is > 80%: 20 points.
If FCF is negative: 0 points. 

3. Net Debt / EBITDA Ratio (\(D\)) - Weight: 15% 
Measures if debt could jeopardize the payment.
Ratio < 1.5x: 100 points.
Ratio 1.5x to 3.0x: 70 points.
Ratio 3.0x to 4.5x: 40 points.
Ratio > 4.5x: 0 points. 

4. Dividend Growth History (\(H\)) - Weight: 10% 
Measures management's commitment to the dividend. 
> 10 consecutive years of increases: 100 points.
5 to 10 years maintaining/increasing: 70 points.
< 5 years or recent cuts: 20 points. 

Practical Example (Company X in 2025) 
Assume a company has the following metrics: 

Earnings Payout: 60% (70 pts)
FCF Payout: 50% (100 pts)
Debt/EBITDA: 2.0x (70 pts)
History: 12 consecutive years of increases (100 pts) 

Calculation:\((0.35\times 70)+(0.40\times 100)+(0.15\times 70)+(0.10\times 100)=24.5+40+10.5+10=\mathbf{85/100}\)

Interpretation of the Result:
 80 - 100: Excellent. Highly unlikely to be cut.
60 - 79: Safe. Good balance, low risk.
40 - 59: Caution. The dividend is vulnerable if earnings drop.
< 40: High Risk. A likely candidate for a cut or suspension.

This is and idea, but there are many ways to calculate a safe dividend score.