The Distribution Safety Score is a rules-based
0–100 estimate of how safe a fund’s distribution looks going forward — an
estimate, not a guarantee — shown on each fund’s
Tickers page. It starts at 100 and deducts points for risk
signals, so the score always comes with a plain-language breakdown of what’s pulling
it down.
What it weighs (largest deductions first):
- Payout trend / recent cut — a falling or recently-cut
distribution over the past year is the biggest red flag.
- Past dividend cut — a deeper cut anytime in the past five
years, even one the fund has since grown back from, so an older reset doesn’t
read as a spotless record.
- Price / NAV erosion — a share price declining over 12 months
alongside a high yield means part of the “income” is really your own capital
coming back.
- Volatility — the erosion signal above compares only the start
and end of the year, so a fund that fell hard mid-year and clawed back can look calm
when it wasn’t. Two extra reads catch that: the deepest peak-to-trough
drawdown during the year (a payout funded through a 30–40% round-trip in NAV
is riskier than the flat endpoints suggest), and beta, how hard the fund swings
versus the broad market. Both are gentle nudges — ordinary market dips aren’t
charged — not headline deductions.
- Extreme yield — a high yield on its own is not a red
flag. Funds built to yield high — option-income / covered-call funds, plus BDCs,
CEFs, MLPs and REITs — are only flagged once the yield is genuinely extreme
(around 40%+), where chronic NAV decay becomes the norm rather than the exception. A
steady high-yield income fund is judged on its payout trend and NAV, not its headline
rate.
- Leverage & concentration — a leveraged book can gap down
hard, and a single-stock fund lives or dies with one company. (Selling options to
generate income is the strategy these funds are built on, not a defect, so it is
no longer treated as a meaningful negative — its real risk shows up directly in the
payout-trend and NAV-erosion signals above.)
- Untested option-income strategy — option-income funds earn their
payout from volatility premium, which rises and falls with market conditions a young fund
may not have lived through yet (a volatility collapse that shrinks premiums, a long bull
market that caps upside, or a fixed-yield policy funded by return of capital). We
don’t penalize the strategy, but such a fund can’t score at the very top of
Safe until it has built a multi-year record across different market regimes.
- Short track record — a fund that hasn’t yet paid enough
distributions to judge its durability. This is measured by the number of payouts
observed, not raw fund age: a monthly or weekly payer proves itself in about a year,
while a quarterly payer needs roughly two.
- Infrequent payout — an annual (once a year) or
semi-annual (twice a year) payer gives far less forward warning of a cut: a lumpy
distribution can already have been slashed and you won’t see it for up to 12 months.
Such a fund stays Unproven until it has a verifiable multi-year record, and then
still carries a small ongoing deduction for that reduced visibility — a little more
for an annual payer than a semi-annual one — even once it’s long
established.
- Distribution coverage (BDCs) — for business development
companies, whether the payout is running ahead of what the fund actually earns. A BDC
paying out more than roughly 90–100% of its earnings has little cushion if income
dips. (Coverage isn’t applied to closed-end funds, whose distributions routinely
include return of capital and capital gains that an earnings ratio ignores.)
- Cost / size — a very small fund or a high expense ratio.
Scores map to bands: 80+ Safe, 60–79 Generally
safe, 40–59 Caution, 20–39 Elevated risk,
below 20 High risk.
Funds that haven’t yet banked enough actual payouts to judge are
labelled Unproven and their score is capped — too new to judge with
confidence, so we set expectations rather than show a reassuring number off a thin history.
Crucially this is gauged by the number of distributions paid, scaled to the
fund’s schedule: a monthly or weekly payer clears it in about a year, while a
quarterly payer needs roughly two — a frequent payer simply produces more evidence in
less time. Annual and semi-annual payers are held to a stricter bar — they stay
Unproven until a verifiable multi-year record accrues, since one or two payouts a year is
little evidence of a durable distribution. It is measured from when the fund
started paying, not when it launched,
so an older fund that only recently began (or resumed) distributions is still treated as
unproven. The score takes a recent, forward-looking view (the last year of payouts plus a
five-year cut check), so it answers “does this payout look durable now?” more
than “has it paid for decades?”
It scores the distribution, not the yield. A fund’s
yield is its annual payout divided by its share price, so the headline yield can
fall for two very different reasons — and only one is a risk. If the actual
per-share distribution is cut, that’s a genuine red flag and the
payout-trend signal above catches it. But if the yield falls only because the
share price rose faster than the (still-growing) payout, nothing is wrong —
that’s price appreciation, not a distribution problem.
Example: a fund whose yield drifts from about 4.4% down to 3.6% over two
years while its per-share distribution actually grew (say +9%) hasn’t cut
anything — its price simply climbed faster than the payout, and the score correctly
leaves it alone. The pattern that does concern the score is the reverse: a yield
climbing because the price is eroding, which the Price / NAV erosion signal flags
directly.
When key inputs are missing, the score also carries a data-completeness
note. Because a missing input applies no deduction, a sparse record could otherwise look
falsely reassuring. A fund we could evaluate on only one of the three core risk signals
— payout trend, 12-month price change, and track record — is flagged
Low confidence and can’t read as Safe. (Strategy tags aren’t
counted toward completeness — most ordinary funds simply don’t carry them, so
their absence isn’t a data gap.)
It’s an educational signal, not investment advice or a guarantee
— a high score isn’t a promise the distribution will hold, and a low one
isn’t a prediction of a cut. Because it leans on trailing signals,
scores tend to run higher after a long calm market and can lag a sharp market or regime
change — a low-volatility stretch makes many funds look their safest. Money-market
funds and funds that don’t pay a distribution aren’t scored.
jumps instantly to the minimum, while Shift +
jumps to the maximum.
