1. How to Avoid Dividend Disasters

2. The Biggest Dividend Disasters Dividend stops being paid Dividend eats up capital Incredible shrinking dividend Company runs out of cash Bankruptcy Business model stops working

3. Causes of Dividend Disasters Dividends not covered by income or cash flow Business depends on finite assets or leases Business model produces declining income – Fixed line telecoms – Old mines or oil/gas properties – Buildings reaching end of business life Business model depends on market distortion – Mortgage REITs

4. Avoid Disasters with the Certainty Index Fundamental question: Will the dividend continue to be paid? Index covers both short and long term Short-term: Are the next couple of quarterly dividends safe? Long-term: Will the dividend continue or increase over the next three to five years? Modified, can also be used for options and takeovers.

5. The Short-term Certainty Index Ratio of Earnings to Dividends Paid (35%) Ratio of Cash Reserves to Dividends Paid (20%) Historic Variability of Quarterly Earnings (20%) Risk of Upsets to Business Model (15%) Past Persistence of Dividends (10%) Grade each out of 10 and take the weighted average; the result is roughly the probability of payment.

6. Example: Safe Bulkers Inc. (NYSE:SB) Earnings $1.19, dividends $0.60 – 9 Cash reserves $28.1m, dividend $11m – 8 Last four quarters: $22m, $21m, $24m, $20m – 9 Risk of upsets to business model – 4 – Bulk carrier rates very volatile, not all on time charters Past persistence -- $0.15/quarter since 2009 – 7 Conclusion: SB has Short-term Certainty Index Rating of 8.05 out of 10 (high safety).

7. The Long-Term Certainty Index Risk of upsets to business model – 30% Past persistence of dividends – 25% Variability of annual earnings – 20% Dividend times coverage – 15% Ratio of Cash Reserves to Dividends Paid – 10% Grade each out of 10 and take the weighted average; the result is roughly the probability of payment.

8. Example: Safe Bulkers Inc. (NYSE:SB) Risk of upsets to business model – 3 – Bulk carrier market very subject to overbuilding Past persistence -- $0.15/quarter since 2009 – 6 Last five years of earnings: $90m, $110m, $165m, $119m, $209m – 5 About two times covered – 9 Cash reserves $28.1m, dividend $11m – 8 Conclusion: SB has a Long-term Certainty Index Rating of 5.55 out of 10 (marginal safety). Overall: SB solid in the short term, needs watching long term

9. Example: American Capital Agency Corp. (NasdaqGS:AGNC) Mortgage REIT Buys mortgage bonds, finances in repo market Highly vulnerable to interest rate rise Certainty Index analysis: $3.58 earnings, $5 dividend – 2 Cash reserves $2401m, dividend $286m – 9 Last four quarters: $264m, $641m, $209m, $251m – 2 Risk of upsets to business model – 2 Persistence – was $1.40, now $1.25 – 4 Score: 3.6 Long-term score 2.9 (dangerous)

10. Example: Frontier Communications Corp. (NasdaqGS:FTR) Rural telecom co. recently merged Verizon Landline business eroded, div declining Certainty Index analysis: Earnings roughly 25% dividends – 1 Cash reserves $421m, dividend $96m – 7 Last four quarters: $27m, $42m, $20m, $32m – 4 Dividend now $0.10, was $0.25 – 1 Risk of upsets to business model – 4 Score: 3.1 Long-term score: 3.1 (dangerous)

11. Conclusion Dividend disasters kill portfolios – Income AND Capital loss Certainty Index helps avoid them - screens good from bad - Short-term and long-term analysis Good Investing!