Dividend and Earnings Stability - Graham's Quality Filter

Graham's criteria

"One of the most persuasive tests of high quality is an uninterrupted record of dividend payments for the last 20 years." - The Intelligent Investor, Ch. 14
"The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition." - The Intelligent Investor, Ch. 14

Stable earnings and dividends are evidence of durability and management discipline.

Why it matters

• Reduces the odds of permanent impairment.
• Indicates business resilience across cycles.
• Supports valuation with cash returned to owners.
• Filters out story stocks with fragile economics.

How to apply the filter

• Look for 10-year earnings without losses; avoid frequent deep drops.
• Seek 20-year uninterrupted dividends for defensive picks; shorter but steady records for enterprising picks.
• Pair with balance-sheet tests (current ratio, debt levels) to ensure safety of principal.

Practical checks

• Plot 10-year EPS and dividends; flag drawdowns >30%.
• Read footnotes for one-time boosts masking instability.
• Avoid payout ratios that imply over-distribution; stability needs coverage.

Takeaways

• Stability is a quality gate, not a guarantee.
• Dividends plus earnings records filter candidates; margin of safety sets the buy price.
• Use this filter to stay out of low-quality traps and to size defensively.