A quality filter for income investors

A high yield can be attractive. It can also be a warning sign.

IQ Score is designed to help income investors distinguish between investments where the income appears well supported and investments where the evidence is weaker, deteriorating or simply unclear.

Every covered investment receives an Income Quality Score from 0 to 100 and is classified as a:

Friend — stronger evidence of durable income quality
Question Mark — mixed, incomplete or uncertain evidence
Foe — meaningful signs of weak or deteriorating income quality

IQ Score is not designed to predict what a security’s price will do next. It is a systematic way of evaluating the quality of the income an investment produces.

What we are trying to measure

The central question behind IQ Score is simple:

How much confidence should an income investor have in the quality and durability of this investment’s income?

The exact evidence differs by asset class, but the underlying principles remain consistent: sustainable income, preservation of capital, resilience over time and sufficient evidence to support the conclusion.

Depending on the type of investment, we may consider evidence relating to:

• the sustainability of distributions;
• the history and consistency of income payments;
• preservation of capital or net asset value;
• long-term return behavior;
• resilience during difficult market periods;
• changes in the distribution;
• the consistency and quality of the available evidence.

No single metric determines the result.

And importantly, yield itself is not treated as evidence of quality.

An unusually high yield can be attractive, but it can also be the result of a falling share price, weakening economics or a distribution that may prove difficult to sustain.

Different investments require different evidence

A Closed-End Fund is not a Business Development Company. A REIT is not an Income ETF.

Applying exactly the same methodology to every income-producing security would create a false sense of precision.

IQ Score uses a common philosophy across asset classes while adapting the evidence and its interpretation to the structure of the investment.

Our methodology covers four core income-oriented asset classes:

Closed-End Funds (CEFs)
Business Development Companies (BDCs)
Real Estate Investment Trusts (REITs)
Income ETFs

Additional income-oriented asset classes may be added when the methodology, data quality and investment universe meet our standards.

Closed-End Funds

Closed-End Funds are designed to distribute income, but the size of that distribution does not tell us whether the income is sustainable.

For CEFs, IQ Score looks for evidence that the fund has been able to provide income while preserving the capital supporting that income.

Areas we consider include:

Distribution sustainability

Has the fund historically demonstrated an ability to support what it distributes?

A large distribution is not automatically a positive if maintaining it comes at the expense of the underlying capital base.

Capital preservation

Income is only part of the return an investor receives.

Persistent erosion of shareholder capital can turn an attractive-looking distribution into a poor long-term outcome.

NAV resilience

Net Asset Value provides an important view of what is happening beneath the market price of a Closed-End Fund.

Persistent deterioration can be an important warning signal.

Distribution reliability

We look at the history and direction of distributions rather than simply the current yield.

Consistency matters, but so does the economic cost of producing that consistency.

The objective is to distinguish funds that appear capable of producing durable income from those where the headline distribution may be masking deterioration underneath.

Business Development Companies

Business Development Companies generate income primarily by lending to and investing in private and middle-market businesses.

That structure creates a different set of risks from a traditional investment fund.

IQ Score therefore evaluates BDCs using evidence relevant to the durability of shareholder income and the preservation of investor capital.

Areas we consider include:

Distribution support and reliability

We look for evidence that the income delivered to shareholders has been sustainable rather than dependent on increasingly fragile conditions.

Capital preservation

A high distribution is less attractive if it is accompanied by persistent destruction of shareholder value.

Long-term return behavior

Income and capital returns need to be considered together.

A BDC should not be judged solely on the amount it distributes.

Downside resilience

We consider how the investment has behaved through difficult periods and whether deterioration appears temporary or persistent.

Income consistency

A dependable income stream can be valuable, but consistency alone is not enough. The quality of that income matters as well.

Our BDC research continues to evolve as better fundamental data becomes available and as we test additional evidence across longer market histories.

Research models and experimental improvements do not affect published IQ Scores until they have completed our validation and production review process.

Real Estate Investment Trusts

REITs are popular with income investors because of their distribution-focused structure.

But once again, the current dividend yield tells only part of the story.

IQ Score looks for evidence that a REIT has been able to provide income while maintaining sufficient resilience in the investment itself.

Areas we consider include:

Distribution reliability

We examine the stability and direction of the income paid to shareholders.

Capital preservation

Persistent capital deterioration can be a sign that the current income is coming at too high a cost.

Long-term return behavior

We consider the broader shareholder outcome rather than treating the dividend as an isolated number.

Downside resilience

Severe or persistent deterioration during difficult market periods can provide useful evidence about the quality of the investment.

Income consistency

A stable distribution history can be valuable evidence, particularly when combined with resilient shareholder returns.

IQ Score should not be interpreted as a complete property-level or balance-sheet analysis of a REIT.

It is an income-quality assessment designed to bring together the evidence that we believe is most useful when evaluating the durability of income.

Income ETFs

Income ETFs can generate distributions in very different ways.

Some primarily pass through dividends or interest generated by their underlying holdings. Others use strategies designed to increase distributable income.

As a result, the headline yield alone can tell an investor very little about the quality of that income.

IQ Score therefore looks beyond the current distribution rate.

Areas we consider include:

Distribution sustainability

Has the ETF demonstrated an ability to maintain its income without persistent deterioration?

Income consistency

How dependable has the distribution stream been over time?

Capital preservation

Has the investment been able to generate income while preserving shareholder capital?

Long-term return behavior

Income should always be considered alongside what has happened to the investor’s capital.

Downside resilience

We look for evidence of how the investment has behaved through more difficult market environments.

A very high ETF yield is therefore not automatically considered a strength.

IQ Score is designed to distinguish between income that appears durable and income that may be coming at too high a cost to the investor’s capital.

Yield is not quality

One of the easiest mistakes in income investing is to assume:

Higher yield = better income investment

It doesn’t.

A security yielding 14% can provide less durable income than one yielding 8%.

A high yield can result from many different circumstances, including a falling share price, aggressive distributions or deteriorating underlying economics.

That is why IQ Score asks a different question:

How good is the income, rather than how large is the yield?

That distinction sits at the heart of the methodology.

The score is more than a number

An IQ Score reflects the available evidence.

But not every investment comes with the same quantity or quality of evidence.

A security with a long, consistent history gives us more to evaluate than one with limited history or incomplete information.

That matters.

Two investments should not necessarily be viewed as equally certain simply because they happen to receive the same numerical score.

Where the evidence is limited, inconsistent or unreliable, IQ Score is designed to be cautious rather than manufacture certainty.

Friends, Question Marks and Foes

The classifications are intended to make IQ Score easier to interpret.

They provide a practical way of separating stronger income-quality candidates from investments that deserve more investigation or caution.

Friend

A Friend shows stronger evidence that its income has historically been supported and that shareholder capital has remained reasonably resilient.

A Friend is not guaranteed to maintain its distribution.

It is also not automatically an attractive investment at every price.

It simply means that, within the IQ Score framework, the available evidence currently points toward stronger income quality.

Question Mark

A Question Mark means the evidence is mixed or uncertain.

There may be positive characteristics alongside meaningful weaknesses.

In other cases, there may simply not be enough reliable evidence to justify a stronger conclusion.

Question Marks deserve investigation rather than automatic rejection.

They are exactly what the name suggests:

investments where there are still important questions to answer.

Foe

A Foe shows meaningful evidence of weak or deteriorating income quality.

That can occur when income appears poorly supported, distributions have weakened, shareholder capital has persistently deteriorated, or several warning signs appear together.

A Foe is not a prediction that the security will fall in price.

It is a warning that the characteristics we look for in a durable income investment are currently weak.

Point-in-time scoring

Investment quality changes.

Distributions change. Prices change. NAV changes. New information becomes available.

IQ Score therefore evaluates investments using information available at a defined point in time.

Our monthly IQ Score snapshots are frozen historical records of what the methodology concluded at that point.

This is important.

Historical results should not quietly change because information became available later.

Keeping point-in-time records allows us to see how IQ Scores and classifications actually evolved.

That creates the foundation for questions such as:

• How often do Friends remain Friends?
• How frequently do Foes recover?
• Which investments deteriorated before a distribution problem became obvious?
• Which warning signs proved meaningful?
• How stable are IQ Scores through different market environments?

Historical scoring is governed so that methodology and data changes can be traced rather than silently rewriting the past.

We publish the framework, not the formula

We believe investors should understand what IQ Score is trying to measure.

You should understand the principles behind the score, the types of evidence we consider and what the resulting classification means.

But IQ Score is also proprietary.

The detailed scoring methodology — including weighting, transformations, thresholds, interaction rules, data-treatment logic and other model mechanics — is not published.

There are two reasons for this.

First, these details represent a significant part of the research and intellectual property behind IQ Score.

Second, the methodology continues to improve as we test it against additional data, market environments and investment structures.

Changes to the production methodology are reviewed and versioned before they affect published IQ Scores.

Our goal is therefore to be transparent about what we are measuring without publishing a recipe for reproducing the model.

A systematic framework, not a promise

IQ Score is systematic.

Markets are not.

No model can know with certainty whether a distribution will be cut, whether an investment will outperform or whether shareholder capital will be preserved.

The purpose of IQ Score is not to remove uncertainty.

It is to organize the available evidence consistently.

That helps investors avoid relying purely on yield, recent performance, reputation or intuition when assessing an income investment.

A strong IQ Score does not mean an investment cannot disappoint.

A weak IQ Score does not mean an investment cannot recover.

It means the evidence looks different.

And that difference is worth knowing.

How to use IQ Score

IQ Score works best as a filter, not as a replacement for investment research.

It can help you:

• identify potentially stronger income investments;
• discover existing holdings that deserve closer attention;
• compare income quality across a portfolio;
• investigate investments whose quality appears to be deteriorating;
• avoid allowing an unusually high yield to dominate your investment decision.

A Friend can still be expensive.

A Foe can still rise in price.

And a Question Mark can become either one.

IQ Score is designed to help answer one specific question well:

How strong is the available evidence that this investment can continue to deliver quality income without destroying the capital behind it?

Methodology evolves

Income markets change.

The available data improves.

And our research continues.

We regularly test potential improvements against historical data and real-world investment outcomes before they are incorporated into the production scoring system.

New data simply becoming available does not automatically mean it belongs in IQ Score.

More complexity does not automatically make a model better.

The objective is always the same:

Better distinguish durable income from income that only looks attractive on the surface.

That is the standard against which methodology changes are evaluated.

Important

IQ Score is provided for informational and research purposes only.

It does not constitute investment advice, a recommendation to buy or sell a security, or a guarantee of future distributions, investment returns or capital preservation.