Building a Dividend-Growth Watchlist: Screening Criteria, Safety Scores and Dividend History Checks
Set numeric screening thresholds, build a ten-point dividend safety score, verify a company's dividend history properly and keep the watchlist balanced across sectors.
What you will learn
- A two-stage process: a numeric screen, then a scorecard for the survivors.
- A ten-point dividend safety score you can calculate from an annual report.
- How to check a dividend history for hidden cuts, freezes, specials and currency effects.
- Sector-balance rules that stop a watchlist becoming three sectors in disguise.
Explanation
Earlier lessons gave you the tools: payout ratios and cover (lesson 2), cut signals (lesson 3) and aristocrat index rules (lesson 4). A watchlist turns them into a routine. A watchlist is a list of companies you would buy at the right price, each with a score and a review date; it is not a portfolio.
Stage 1: the screen
A screener applies hard filters. Suggested starting thresholds; adjust them, but write them down:
| Criterion | Threshold | Why |
|---|---|---|
| Dividend yield | 1.5% to 5.5% | Below 1.5% income is negligible; above 5.5% the market is pricing a risk |
| Five-year dividend growth rate | at least 4% per year | Growth above inflation is the point of the strategy |
| Years without a cut | at least 10 | Covers at least one recession |
| Free-cash-flow payout ratio | below 75% | Leaves room for a bad year |
| Net debt / EBITDA | below 3.0 | Refinancing risk rises quickly above this |
| Market capitalisation | above €2 billion | Liquidity and reporting quality |
A useful cross-check is the yield-plus-growth number: dividend yield plus five-year dividend growth rate. A rule of thumb among dividend-growth investors (the "Chowder number") asks for at least 10 to 12 for most sectors and about 8 for utilities and REITs, whose growth is structurally slower. It is a filter, not a forecast.
Stage 2: the safety score (0 to 10 points)
| Test | 2 points | 1 point | 0 points |
|---|---|---|---|
| Free-cash-flow payout (utilities, REITs: sector cover from lesson 2) | below 50% | 50% to 70% | above 70% |
| Net debt / EBITDA | below 2.0 | 2.0 to 3.0 | above 3.0 |
| Years without a cut | 10 or more | 5 to 9 | under 5 |
| Interest coverage (EBIT / interest) | — | above 8 | 8 or below |
| Five-year dividend growth | — | 5% or more | under 5% |
| Free cash flow positive in each of the last five years (utilities, REITs: regulated or contracted share of earnings above 70%) | — | yes | no |
| Investment-grade credit rating | — | yes | no or unrated |
Rule: 7 to 10 points = buy candidate; 5 to 6 = watch only; below 5 = remove. Apply the same weights to every company and re-score after each annual report.
Dividend history checks
Do not trust a screener's "years of growth" field. List the dividend per share from the company's investor-relations page for at least 12 years, so that 2008–2009 and 2020 are included. Look for: a cut hidden by a change of payment frequency; a freeze (same amount for years, which many screeners count as "no cut"); special dividends that inflate one year; a dividend declared in a currency other than the reporting currency; and a payout maintained only by rising debt.
Sector balance
Dividend screens overfill with staples, utilities, telecoms and tobacco. Cap the list at three names per sector, require at least six sectors, and record each company's revenue currency so you do not build a list of 20 US-dollar earners without noticing.
Worked example
Hypothetical example: three companies pass the screen (invented figures).
| Test | A (staples) | B (telecom) | C (utility) |
|---|---|---|---|
| Payout / cover | 55% → 1 | 95% → 0 | 65% earnings payout → 1 |
| Net debt / EBITDA | 1.8 → 2 | 3.4 → 0 | 2.8 → 1 |
| Years without a cut | 25 → 2 | 12 → 2 | 8 → 1 |
| Interest coverage | 12 → 1 | 4 → 0 | 5 → 0 |
| Five-year growth | 8% → 1 | 1% → 0 | 4% → 0 |
| FCF positive / regulated share | yes → 1 | yes → 1 | 80% → 1 |
| Investment grade | yes → 1 | yes → 1 | yes → 1 |
| Score | 9 | 4 | 5 |
| Yield + growth | 2.8 + 8 = 10.8 | 7.5 + 1 = 8.5 | 4.5 + 4 = 8.5 |
A is a buy candidate (9 points, yield-plus-growth above 10). B scores 4 and fails the growth check despite its 7.5 percent yield: it leaves the list. C scores 5 and passes the utility threshold of 8: it stays on watch until coverage improves or the record reaches ten years.
Common mistake
Practice activity
On paper: score this hypothetical industrial company and decide what to do with it. Free-cash-flow payout 48 percent; net debt / EBITDA 2.3; 14 years without a cut; interest coverage 9; five-year dividend growth 6 percent; free cash flow positive in four of the last five years; rated investment grade; dividend yield 3.1 percent.
Show solution
Payout 48% → 2; net debt / EBITDA 2.3 → 1; 14 years → 2; coverage 9 → 1; growth 6% → 1; FCF positive in only four of five years → 0; investment grade → 1. Score 8 of 10: buy candidate. Yield-plus-growth 3.1 + 6 = 9.1, just below 10, so note it as "candidate, prefer a slightly higher entry yield" and check why free cash flow was negative in one year (a large one-off investment is acceptable; a working-capital problem is not).
Limitations: a score summarises the past; it cannot see a regulatory change or a new competitor, which is why the history check and the annual re-score are part of the routine.
Key takeaways
- Screen with written thresholds, then score survivors with the same ten-point card every time.
- Check 12 years of dividend history yourself; freezes, specials and currency changes hide in screener fields.
- Use yield-plus-growth as a cross-check, lower bar for utilities and REITs.
- Cap each sector at three names and track revenue currency.
Next step
Next, from watchlist to portfolio: yield targets, position and sector caps, a monthly cash-flow calendar and reinvestment rules.
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