Savvy Nickel
by Charles B. Carlson
Charles Carlson's practical guide to building a high-yield dividend portfolio using his BSD (Big Safe Dividends) formula. Carlson shows how to screen for dividend-paying stocks with sustainable, growing payouts — a strategy that has historically outperformed the broader market with less volatility.
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Charles Carlson is editor of the DRIP Investor newsletter and one of the leading authorities on dividend reinvestment plans. The Little Book of Big Dividends presents his BSD formula — a systematic approach to identifying stocks with dividends large enough to matter and safe enough to rely on. For income-focused investors who want a disciplined framework for dividend stock selection rather than just chasing the highest yields, this book provides a complete, implementable system.
| Attribute | Details |
|---|---|
| Title | The Little Book of Big Dividends |
| Author | Charles B. Carlson |
| Publisher | Wiley |
| Published | 2009 |
| Pages | 224 |
| Reading Level | Beginner to Intermediate |
| Amazon Rating | 4.2/5 stars |
Hardcover: Buy on Amazon
Kindle: Buy on Amazon
Charles Carlson has edited the DRIP Investor newsletter since 1989 and is the author of several books on dividend investing and direct stock purchase plans. His focus on dividend reinvestment plans (DRIPs) and dividend growth investing predates the broad popularization of dividend investing by at least a decade. He is one of the most experienced and credible practitioners in dividend-focused investing.
Carlson's system rests on three words: Big, Safe, and Dividends.
A dividend yield is meaningful when it:
The yield threshold:
Carlson defines "big" as a dividend yield at least 50% above the S&P 500's average yield. When the S&P 500 yields 2%, a "big" dividend is 3%+. When the market yields 1.5%, a big dividend is 2.25%+.
Why absolute yield alone misleads:
A 10% yield on a company with declining earnings is a yield trap — the company will likely cut the dividend, causing both income loss and capital loss. The "big" criterion requires assessing yield in context, not in isolation.
The relative yield approach:
Rather than screening for the highest absolute yield, Carlson screens for stocks yielding significantly above their own historical average. A stock that typically yields 2.5% and now yields 4.5% may be signaling that the market has unfairly punished it — creating a potential value + income opportunity.
Carlson's most important contribution is his quantitative dividend safety scoring system. He evaluates five factors:
Safety Factor 1: Earnings Coverage
Payout Ratio = Dividends Paid / Earnings Per Share| Payout Ratio | Safety Level |
|---|---|
| Below 40% | Very safe — substantial coverage |
| 40-60% | Safe — comfortable coverage |
| 60-75% | Moderate — watch for earnings declines |
| 75-90% | Risky — limited buffer for earnings drops |
| Above 90% | Danger — one bad year threatens dividend |
| Above 100% | Unsustainable — paying more than earned |
Safety Factor 2: Cash Flow Coverage
Earnings can be manipulated through accounting choices; cash flow cannot be fabricated as easily.
Free Cash Flow Payout Ratio = Dividends Paid / Free Cash FlowA company with positive earnings but negative free cash flow is funding its dividend through debt or asset sales — unsustainable. The FCF payout ratio provides a cleaner safety test than the earnings payout ratio.
Safety Factor 3: Dividend Growth History
Companies that have raised dividends consistently for 10+ years have demonstrated:
The Dividend Aristocrats:
S&P 500 companies that have raised dividends every year for 25+ consecutive years. Research shows these companies outperform the broader market over long periods with lower volatility.
Safety Factor 4: Balance Sheet Strength
| Metric | Threshold for Dividend Safety |
|---|---|
| Debt/EBITDA | Below 3x |
| Interest coverage | Above 5x |
| Current ratio | Above 1.5x |
| Net debt/equity | Below 50% |
Highly leveraged companies face dividend risk during economic downturns when cash flows decline and debt service must still be met.
Safety Factor 5: Business Model Durability
Some industries produce more reliable cash flows than others:
| Industry | Cash Flow Reliability | Dividend Sustainability |
|---|---|---|
| Regulated utilities | Very high | Very high |
| Consumer staples | High | High |
| Healthcare | High | High |
| REITs | Medium-High (rent income) | Medium-High |
| Financials | Medium (credit cycle exposure) | Medium |
| Energy | Low (commodity price exposure) | Low-Medium |
| Technology | Low-Medium (disruption risk) | Medium |
| Cyclicals (materials, industrials) | Low | Low |
Carlson makes the powerful case that dividend growth is more important than current yield for long-term investors.
When you buy a stock, your "yield on cost" is:
Yield on Cost = Current Annual Dividend / Your Original Purchase PriceFor a dividend growth stock, yield on cost improves every year the dividend is raised:
Example — Johnson & Johnson:
| Year | Purchase Price | Annual Dividend | Yield on Cost |
|---|---|---|---|
| Purchase year | $60 | $2.00 | 3.3% |
| 5 years later | $60 (cost) | $2.60 | 4.3% |
| 10 years later | $60 (cost) | $3.40 | 5.7% |
| 20 years later | $60 (cost) | $5.60 | 9.3% |
A 3.3% initial yield becomes a 9.3% yield on cost after 20 years of 5% annual dividend growth. This "income acceleration" is one of the most powerful features of dividend growth investing.
Academic research consistently shows that dividends explain a substantial portion of total equity returns:
Historical contribution of dividends to S&P 500 total return (1926-2023):
| Component | Annual Contribution |
|---|---|
| Price appreciation | ~5.0% |
| Dividend income | ~4.2% |
| Total return | ~9.2% |
Dividends historically accounted for approximately 45% of total stock market returns. In low-growth, low-yield environments (2010s), this proportion declined. Over longer time horizons, dividends are crucial.
The reinvestment power:
When dividends are reinvested (buying additional shares with dividend income), the compounding accelerates dramatically:
| $10,000 invested in S&P 500 (1980-2023) | Final Value |
|---|---|
| Price return only | ~$115,000 |
| Total return (dividends reinvested) | ~$475,000 |
The difference is almost entirely dividends reinvested — a 4x difference over 43 years.
Carlson is the leading authority on DRIPs — company-administered plans that allow shareholders to reinvest dividends directly in new shares, often at no commission and sometimes at a discount to market price.
| Feature | Company DRIP | Broker Auto-Reinvestment |
|---|---|---|
| Commissions | Zero | Usually zero (in modern era) |
| Discount | Sometimes 3-5% on reinvestment | Market price only |
| Fractional shares | Yes | Yes |
| Direct ownership | Yes (shares registered to you) | No (held in street name) |
| Complexity | Higher (separate account per company) | Lower (one brokerage account) |
In the modern era of zero-commission brokerages, broker reinvestment is simpler and nearly equivalent to DRIPs for most investors. DRIPs retain advantages when companies offer reinvestment discounts.
Carlson provides detailed analysis of the Dividend Aristocrats strategy — owning the S&P 500 companies that have raised dividends for 25+ consecutive years.
A 25+ year streak of annual dividend increases requires:
A company that has raised dividends every year through the 1987 crash, the 2001 recession, the 2008-2009 financial crisis, and the 2020 pandemic has demonstrated extraordinary resilience.
| Strategy | Annual Return (1990-2023 approx.) | Volatility |
|---|---|---|
| S&P 500 | ~10.5% | Standard |
| Dividend Aristocrats | ~12.0% | Lower than market |
| Dividend growth stocks | ~11-12% | Lower than market |
The Aristocrats' outperformance with lower volatility represents genuine risk-adjusted alpha — likely attributable to the quality screening implicit in 25 years of consecutive dividend growth.
Available vehicles:
| Vehicle | Ticker | Expense Ratio |
|---|---|---|
| ProShares S&P 500 Dividend Aristocrats ETF | NOBL | 0.35% |
| SPDR S&P Dividend ETF | SDY | 0.35% |
| Vanguard Dividend Appreciation ETF | VIG | 0.06% |
Carlson dedicates significant coverage to errors he observes repeatedly:
Buying the highest-yield stocks regardless of safety. The highest yields often signal:
The yield trap:
A stock yielding 12% when the sector average is 4% is typically offering a yield trap — the market is predicting the 12% dividend will not survive.
The rule: Never buy a stock yielding more than 2x the sector average without detailed safety analysis.
A stock yielding 5% with no dividend growth is worth less to a long-term investor than a stock yielding 2.5% growing its dividend at 10% annually:
| Investment | Year 1 Income | Year 10 Income | Yield on Cost (Year 10) |
|---|---|---|---|
| 5% yield, 0% growth | $500 | $500 | 5.0% |
| 2.5% yield, 10% growth | $250 | $649 | 6.5% |
By year 10, the growth stock pays more income annually and has substantially higher yield on cost.
Reaching for yield by overconcentrating in utilities, MLPs, or REITs creates sector risk. When interest rates rise, all high-yield sectors tend to sell off simultaneously — a correlation that eliminates diversification precisely when it is most needed.
Portfolio construction guidance:
| Asset Class | Max Recommended Weight |
|---|---|
| Any single stock | 5% |
| Any single sector | 25% |
| REITs | 10-15% |
| Utilities | 10-15% |
| Energy MLPs | 5-10% |
Carlson's recommended portfolio construction:
Step 1: Universe filter
Step 2: Yield filter
Step 3: Safety screening
Step 4: Quality screen
Step 5: Valuation
| Component | Number of Stocks | Sectors |
|---|---|---|
| Core holdings | 15-20 | Diversified across 6-8 sectors |
| Positions per sector | 2-4 | Maximum 3-4 sectors with high yield |
| Target yield (portfolio) | 3-5% | Current yield on portfolio |
Rating: 4.2/5
The Little Book of Big Dividends provides one of the most practical frameworks for dividend safety screening available in any book. Its BSD formula, yield-on-cost analysis, and Dividend Aristocrats discussion are directly implementable. The age of the publication (2009) limits its applicability to the current rate environment, but the safety framework is timeless.
Hardcover: Buy on Amazon
Kindle: Buy on Amazon
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