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, asset structure, risk signals, distribution behavior, and available financial 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 asset class requires extra caution, the available data is incomplete, 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?

The framework looks at areas such as distribution behavior, yield level and sustainability, price and NAV behavior where available, income coverage where available, leverage and balance sheet risk, asset-class-specific financial strength, volatility and drawdown behavior, data availability and confidence, recent deterioration or improvement, and structural red flags.

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

Score, classification, and confidence

The IQ Score is the numerical quality score.

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

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

The confidence level tells you how much supporting data the framework has.

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."

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. A closed-end fund, business development company, REIT, ETF, preferred security, and bond fund each has a different structure.

CEFs: Closed-End Funds

For CEFs, the IQ Score pays special attention to distribution history, NAV behavior, price versus NAV behavior, discount and premium context, leverage risk, long-term total return quality, volatility and drawdowns, signs of destructive distribution policy, and whether yield is supported by asset performance or mostly by investor appetite.

Key question:

Is this fund producing income from a healthy underlying engine, or is the distribution masking NAV erosion?

BDCs: Business Development Companies

For BDCs, the IQ Score places more weight on company-level financial strength: dividend coverage, net investment income trends, NAV per share stability, credit quality, non-accrual levels where available, leverage, portfolio performance, management quality signals, dividend growth or cuts, and balance sheet resilience.

Key question:

Is the dividend supported by recurring investment income and a healthy loan portfolio?

REITs: Real Estate Investment Trusts

For REITs, the IQ Score looks more closely at dividend safety, funds from operations where available, payout profile, leverage and debt maturity risk, sector-specific pressure, occupancy and cash-flow stability where available, share price drawdown, distribution history, and balance sheet strength.

Key question:

Is the dividend supported by real estate cash flow, or is the balance sheet under pressure?

ETFs: Exchange-Traded Funds

For ETFs, the IQ Score considers the underlying strategy, distribution behavior, volatility, drawdown profile, long-term return quality, income consistency, expense burden, asset base and liquidity, and whether yield comes from income, option premiums, leverage, or capital erosion.

Key question:

Is the income strategy durable, or is the yield mainly a product feature?

Preferreds and baby bonds

For preferred shares and baby bonds, the IQ Score looks at issuer strength, capital structure position, yield level versus risk, price volatility, call risk where relevant, maturity or perpetual structure, credit and refinancing pressure, and liquidity.

Key question:

Is the income attractive enough for the issuer and structure risk?

Funds of funds and mixed income vehicles

For mixed or complex income vehicles, the IQ Score is more cautious. It looks at transparency, strategy stability, distribution behavior, long-term return quality, volatility and drawdown behavior, asset base, data completeness, and signs that complexity is hiding weakness.

Key question:

Can we understand the source of income well enough to trust the classification?

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.

Why frozen monthly snapshots matter

IQ Scores are published as frozen monthly snapshots.

That means each monthly update captures the framework output at a specific point in time. The snapshot is not rewritten afterward to make the past look cleaner.

This matters because income quality changes. Funds cut distributions. BDCs improve coverage. REITs repair balance sheets. ETFs change behavior. CEF discounts widen or narrow. Data availability improves. Risk signals can strengthen or weaken.

A frozen snapshot creates 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 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.