IQ Score Methodology

A quality filter for income assets

Most income investors start with yield.

That makes sense. Yield is visible, easy to compare, and emotionally attractive. But yield alone does not tell you whether the income is healthy, sustainable, improving, weakening, or quietly turning into a trap.

The IQ Score is built to answer a different question:

What is the quality behind this income asset?

Instead of ranking assets by yield alone, the IQ Score looks at the underlying income profile, distribution behavior, capital preservation, financial resilience, risk signals, and available supporting data. Each asset is then classified as a Friend, Question Mark, or Foe.

The goal is not to predict the next price move.

The goal is to help income-focused investors separate stronger income assets from weaker ones before they add more capital.

The three classifications

Friend

A Friend is an income asset that currently passes the quality framework with enough supporting data.

Friends are not guaranteed winners. They can still go down in price, cut distributions, or underperform. But based on the available data, they show a healthier profile than the broader high-yield universe.

In plain English:

A Friend is an income asset that deserves attention for the right reasons.

Question Mark

A Question Mark is not clearly strong enough to be a Friend, but not clearly weak enough to be a Foe.

This can happen because the data is mixed, the asset has both strengths and weaknesses, the income profile is uncertain, the available data is incomplete, a significant risk flag is present, or the score is close to a classification boundary.

In plain English:

A Question Mark needs more evidence before it earns trust.

Foe

A Foe is an income asset where the framework detects enough weakness, risk, deterioration, or insufficient quality to classify it negatively.

A Foe may still have a high yield. That is often the problem. Weak income assets can look attractive because the yield looks generous, while the underlying quality is already deteriorating.

In plain English:

A Foe is the kind of income asset where yield may be distracting you from quality risk.

What the IQ Score measures

The IQ Score combines multiple quality signals into one framework.

The exact inputs differ by asset class, because a CEF is not a BDC, a BDC is not a REIT, and an ETF is not an operating company.

Still, the logic is consistent:

Does this asset appear to support durable income, or is the yield coming with too many warning signs?

Depending on the asset class, the framework can evaluate areas such as:

• distribution coverage and reliability;
• distribution cuts and longer-term distribution trends;
• NAV or capital preservation where economically relevant;
• balance-sheet resilience;
• leverage and debt-service capacity;
• long-term total-return behavior;
• drawdown and volatility as supporting market evidence;
• data availability, freshness, and confidence;
• deterioration signals and structural risk flags.

Yield itself does not earn an asset a higher quality score simply because it is high.

In several parts of the framework, an unusually high yield can instead become a reason for additional scrutiny when it is not supported by the underlying fundamentals or return profile.

The score is not based on one single number. It is a combined quality view.

Score, classification, confidence — and gates

The IQ Score is the numerical quality score.

A higher score means the asset shows stronger income-quality characteristics inside the applicable asset-class framework. A lower score means the framework detects more weakness, uncertainty, or risk.

The classification translates the framework output into plain language: Friend, Question Mark, or Foe.

The confidence level tells you how much supporting evidence is available.

A high score with weak data should not be treated the same as a high score with broad supporting evidence. Confidence helps separate "this looks strong and the data supports it" from "this looks interesting, but the evidence is thinner."

There is one other important part of the methodology: gates.

A high numerical score alone does not always guarantee a Friend classification.

Some serious risk signals can block an asset from becoming a Friend even when other parts of the score are strong. Depending on the asset class, these can include severe undercoverage, serious NAV deterioration, dangerous leverage, repeated distribution cuts, inadequate liquidity, stale data, or a material mismatch between leverage and debt-service capacity.

This is intentional.

A serious weakness should not be averaged away simply because several unrelated indicators look good.

Asset class differences

The IQ Score uses one common philosophy across income assets, but the analysis changes by asset class.

That is intentional. Income assets do not all work the same way.

CEFs: Closed-End Funds

CEFs are the original production-calibrated IQ Score asset class.

For CEFs, the framework focuses on five core areas:

• Economic Payout Coverage — whether the economic return generated by the fund supports the distributions being paid;
• Capital Preservation — whether shareholder capital has been preserved over the relevant period;
• Distribution Cuts — whether the fund has repeatedly reduced its payout;
• Distribution Trend — whether distributions have been improving or deteriorating;
• NAV Persistence — whether underlying net asset value has been preserved over time.

NAV is particularly important for CEFs because a distribution can look attractive while the underlying asset base is steadily being eroded.

Key question:

Is this fund producing durable income while preserving its underlying capital, or is the distribution masking economic deterioration?

BDCs: Business Development Companies

BDCs require a different framework because they are operating investment companies whose dividend sustainability depends heavily on earnings coverage, NAV preservation, and leverage.

The BDC methodology is built around five economic pillars:

• Distribution Coverage — primarily whether recurring Net Investment Income per share supports the regular distribution;
• NAV Preservation — whether NAV per share is being maintained or eroded;
• Balance-Sheet Resilience — whether leverage remains economically sustainable;
• Distribution Reliability — including distribution cuts, longer-term distribution trend, and payout consistency;
• Market Confirmation — total return, drawdown, and volatility used as secondary supporting evidence rather than the dominant definition of quality.

Where reliable point-in-time NII coverage cannot be established, the framework can use a lower-confidence economic payout coverage fallback rather than fabricate fundamental coverage.

BDC classifications also include hard risk controls. Serious undercoverage, severe NAV deterioration, excessive leverage, or repeated distribution cuts can prevent an otherwise high-scoring BDC from being classified as a Friend.

Key question:

Is the distribution supported by recurring investment income, preserved NAV, and a resilient balance sheet?

REITs: Real Estate Investment Trusts

REITs require special treatment because property companies should not be judged primarily by generic price behavior.

For equity REITs, the current methodology combines three major areas:

• Distribution Reliability — including distribution cuts, distribution trend, and payout consistency;
• Balance-Sheet Resilience — using net debt relative to EBITDA together with interest coverage;
• Market Confirmation — including total return, drawdown, and volatility as supporting evidence.

The framework deliberately looks at both leverage and the ability to service that leverage.

A REIT can appear acceptable on a leverage measure while still having weak interest coverage. When those two signals materially diverge, the framework can block a Friend classification rather than allow the stronger measure to hide the weaker one.

High yield combined with a weak balance sheet or poor return profile can also trigger additional yield-trap scrutiny.

The equity-REIT methodology is applied only when the security can be confidently identified as an equity REIT. Mortgage REITs and ambiguous REIT structures are not silently pushed through the equity-REIT model.

The framework does not currently claim to score REITs using FFO/AFFO payout ratios, occupancy, same-store NOI growth, rental growth, or debt-maturity schedules. Those can be useful investment-research metrics, but they are not part of the current production IQ Score unless and until sufficiently consistent, point-in-time-safe data supports them.

Key question:

Is the distribution supported by reliable payouts and a balance sheet capable of sustaining them through different market conditions?

ETFs: Exchange-Traded Funds

Income ETFs are evaluated using observable security-level behavior rather than trying to infer the quality of every underlying security or investment strategy.

The Income ETF methodology considers:

• Economic Payout Coverage;
• Total Return;
• Drawdown and Recovery;
• Distribution Cuts;
• Volatility;
• Distribution Trend;
• Distribution Consistency.

Asset size and liquidity also matter. An ETF with inadequate liquidity or uncertain asset data may be prevented from receiving a Friend classification or receive lower confidence.

Importantly, yield magnitude is not a positive scoring input.

A high-yield ETF does not receive a better IQ Score simply because it distributes more. The payout must be supported by the broader economic evidence.

Key question:

Does the ETF produce durable income while preserving investor capital, or is the headline yield hiding weak economic performance?

Preferreds, baby bonds, and other income assets

Not every income security currently has the same level of specialized, asset-class-specific methodology.

Where other supported income assets can be evaluated, the framework uses the available observable data and applies conservative confidence and missing-data rules.

We do not present a specialized preferred-stock or baby-bond methodology as production-calibrated until that methodology and its underlying data have been separately validated.

This distinction matters.

When the available evidence is not strong enough to support a specialized quality judgment, the framework should say so rather than pretend to know more than the data allows.

Point-in-time data matters

Income quality should be judged using information that was actually available at the time.

That principle is especially important for financial fundamentals.

A later filing, amendment, or revised data point should not be allowed to make an earlier historical IQ Score look smarter than it could actually have been.

Where fundamentals are used, the methodology therefore applies point-in-time availability rules and fails conservatively when the availability date is ambiguous.

This allows historical scores and snapshots to remain a genuine research record rather than a reconstruction using future-known information.

What the IQ Score does not do

The IQ Score is a quality framework, not a personal financial plan.

It does not give personal investment advice, guarantee returns, predict short-term price moves, tell you exactly when to buy or sell, replace due diligence, replace professional advice, rank assets only by yield, or treat all asset classes as identical.

A Friend is not an automatic buy.
A Foe is not an automatic sell.
A Question Mark is not useless.

The classification is a research signal. It should help investors ask better questions before making capital allocation decisions.

Current scores and frozen monthly snapshots

IQ Score uses current data to keep the latest quality assessment up to date.

Separately, the system creates frozen monthly snapshots.

A frozen snapshot captures the framework output at a specific point in time and is not subsequently rewritten to make the past look cleaner.

This matters because income quality changes.

Funds cut distributions. BDCs improve or lose coverage. REIT balance sheets strengthen or deteriorate. ETFs change their distribution behavior. Market conditions change. New financial statements become available. Risk signals can strengthen or weaken.

Current scores tell you what the framework sees now.

Frozen monthly snapshots preserve what the framework knew then.

Together, they create a research trail.

How to use the IQ Score

The IQ Score is best used as a quality filter.

Before buying an income asset, ask:

Is it a Friend, Question Mark, or Foe?

If it is a Friend, the asset may deserve deeper review.

If it is a Question Mark, understand what is missing, mixed, or uncertain.

If it is a Foe, be careful. The yield may not be telling the full story.

For existing holdings, the IQ Score can help with portfolio hygiene:

• Which holdings are still Friends?
• Which holdings have become Question Marks?
• Which holdings are now Foes?
• Which assets improved?
• Which assets deteriorated?
• Which high-yield positions may deserve extra scrutiny?

The point is not to remove judgment.

The point is to make judgment more disciplined.

The core idea

Income investors do not need another list sorted by yield.

They need a way to judge the quality behind the yield.

That is what the IQ Score is built for.

Yield gets attention. Quality decides whether the income deserves it.