AMAT - 4 Factor Dividend Growth Portfolio - December 2022 Results
Summary
- The 4 factor dividend growth portfolio was launched on November 1st, 2022, and is thus far off to a great start.
- The portfolio generated 0.28% of alpha in December and continues to outpace the S&P 500 Total Return.
- The journey for this portfolio is long but the optimistic start is a welcome sight.
4 Factor Dividend Growth Portfolio
I started the 4 factor dividend growth portfolio on November 1st, 2022. You can read about the strategy, stock selection process and portfolio construction in this article . In a nutshell the strategy leverages the stock selection process of SCHD , or rather its underlying index, the Dow Jones 100 Dividend Index, with a few minor twists. The first major differentiation is the starting universe of stocks, I opted to create my own shortlist of 100+ dividend growth stocks with a history of stable growth and economic moats. The second major difference is the replacement of the return on equity with the return on capital as one of the ranking criteria. I personally believe the return on capital is superior to the return on equity, you can read more of my thoughts on this in the original article referenced earlier.
Here is a snapshot of the actual portfolio as of January 9th, 2023 including each position, the number of shares, current market value, estimated annual dividend, current allocation and target allocation.
| Ticker |
| Shares |
| Market Value |
| Annual Dividend |
| Allocation |
| Target |
| ABBV |
| 0.851440 |
| 137.64 |
| 5.04 |
| 6.83% |
| 6.67% |
| ACN |
| 0.439190 |
| 120.23 |
| 1.97 |
| 5.96% |
| 6.35% |
| ADP |
| 0.275970 |
| 66.10 |
| 1.38 |
| 3.28% |
| 3.56% |
| AMAT |
| 0.489580 |
| 52.14 |
| 0.51 |
| 2.59% |
| 2.69% |
| ASML |
| 0.223530 |
| 138.89 |
| 1.48 |
| 6.89% |
| 6.67% |
| BBY |
| 0.151950 |
| 12.47 |
| 0.53 |
| 0.62% |
| 0.49% |
| BLK |
| 0.085800 |
| 64.61 |
| 1.67 |
| 3.20% |
| 3.24% |
| CSCO |
| 2.859880 |
| 138.93 |
| 4.35 |
| 6.89% |
| 6.61% |
| EXPD |
| 0.125700 |
| 13.81 |
| 0.17 |
| 0.68% |
| 0.57% |
| FAST |
| 0.364810 |
| 17.49 |
| 0.45 |
| 0.87% |
| 0.98% |
| FERG |
| 0.108560 |
| 15.10 |
| 0.38 |
| 0.75% |
| 0.76% |
| GRMN |
| 0.073540 |
| 7.22 |
| 0.21 |
| 0.36% |
| 0.40% |
| HD |
| 0.421060 |
| 133.82 |
| 3.20 |
| 6.64% |
| 6.67% |
| INFY |
| 2.423620 |
| 43.63 |
| 0.97 |
| 2.16% |
| 2.45% |
| KLAC |
| 0.086540 |
| 35.34 |
| 0.45 |
| 1.75% |
| 1.59% |
| LMT |
| 0.161960 |
| 74.34 |
| 1.94 |
| 3.69% |
| 3.86% |
| LOW |
| 0.406170 |
| 81.01 |
| 1.71 |
| 4.02% |
| 4.30% |
| LRCX |
| 0.080980 |
| 36.64 |
| 0.56 |
| 1.82% |
| 1.96% |
| MA |
| 0.380820 |
| 141.27 |
| 0.87 |
| 7.01% |
| 6.67% |
| MPWR |
| 0.030340 |
| 11.63 |
| 0.09 |
| 0.58% |
| 0.54% |
| MRK |
| 1.298850 |
| 143.37 |
| 3.79 |
| 7.11% |
| 6.67% |
| PAYX |
| 0.216150 |
| 25.38 |
| 0.68 |
| 1.26% |
| 1.35% |
| ROL |
| 0.142100 |
| 5.19 |
| 0.07 |
| 0.26% |
| 0.37% |
| SNA |
| 0.028600 |
| 6.88 |
| 0.19 |
| 0.34% |
| 0.41% |
| SWKS |
| 0.115810 |
| 11.17 |
| 0.29 |
| 0.55% |
| 0.49% |
| TROW |
| 0.143730 |
| 16.51 |
| 0.69 |
| 0.82% |
| 0.83% |
| TSM |
| 1.764350 |
| 141.69 |
| 3.14 |
| 7.03% |
| 6.67% |
| TXN |
| 0.571720 |
| 101.01 |
| 2.84 |
| 5.01% |
| 5.17% |
| UPS |
| 0.473580 |
| 86.04 |
| 2.88 |
| 4.27% |
| 4.34% |
| V |
| 0.624460 |
| 136.51 |
| 1.12 |
| 6.77% |
| 6.67% |
December 2022 Results
Most equities lost steam in December and quality dividend stocks were no exception. My portfolio finished the month with a loss of 5.48% which was 0.28% better than the S&P 500 total return. While the alpha generated in December was modest it does build on the 7.66% of alpha from November.
The portfolio is top heavy, with the 7 largest holdings making up 46.69% of the target allocation. These 7 positions enjoyed a better than average return in December of minus 3.91%, and were the primary drivers of alpha for the overall portfolio. The 10 largest holdings make up 64.82% of the target allocation and had an average loss of 5.13% last month. This means positions 8, 9 and 10 had a pretty poor return last month but did not impact the portfolio enough to push it below the return of the S&P 500.
The average loss in December for all 30 holdings was 5.75%, therefore the strategic target allocation led to an extra return of 27 basis points.
Since inception the actual allocation has drifted away from the target allocation, at the moment the absolute drift is 4.82%. This is only a modest increase from the absolute drift a month ago which was 4.11%. The minimal dividend stream this portfolio generates will be used to help minimize long term drift.
Individual Returns and Variations
Here are the individual returns for December for each holding. In the table below you can see the ticker symbol for each holding, the target allocation weight, the total return for December and the respective allocation return in the portfolio.
| Symbol |
| Target Allocation |
| Dec 22 |
| Alloc Return |
| ASML |
| 6.67% |
| -10.15% |
| -0.68% |
| ABBV |
| 6.67% |
| 0.27% |
| 0.02% |
| TSM |
| 6.67% |
| -9.71% |
| -0.65% |
| HD |
| 6.67% |
| -2.51% |
| -0.17% |
| MA |
| 6.67% |
| -2.43% |
| -0.16% |
| V |
| 6.67% |
| -4.26% |
| -0.28% |
| MRK |
| 6.67% |
| 1.41% |
| 0.09% |
| CSCO |
| 6.61% |
| -4.18% |
| -0.28% |
| ACN |
| 6.35% |
| -11.33% |
| -0.72% |
| TXN |
| 5.17% |
| -8.45% |
| -0.44% |
| UPS |
| 4.34% |
| -8.38% |
| -0.36% |
| LOW |
| 4.30% |
| -6.26% |
| -0.27% |
| LMT |
| 3.86% |
| 0.27% |
| 0.01% |
| ADP |
| 3.56% |
| -9.14% |
| -0.33% |
| BLK |
| 3.24% |
| -0.35% |
| -0.01% |
| AMAT |
| 2.69% |
| -11.15% |
| -0.30% |
| INFY |
| 2.45% |
| -11.50% |
| -0.28% |
| LRCX |
| 1.96% |
| -10.70% |
| -0.21% |
| KLAC |
| 1.59% |
| -4.10% |
| -0.07% |
| PAYX |
| 1.35% |
| -6.83% |
| -0.09% |
| FAST |
| 0.98% |
| -8.13% |
| -0.08% |
| TROW |
| 0.83% |
| -11.75% |
| -0.10% |
| FERG |
| 0.76% |
| 8.95% |
| 0.07% |
| EXPD |
| 0.57% |
| -10.46% |
| -0.06% |
| MPWR |
| 0.54% |
| -7.23% |
| -0.04% |
| BBY |
| 0.49% |
| -4.96% |
| -0.02% |
| SWKS |
| 0.49% |
| -4.70% |
| -0.02% |
| SNA |
| 0.41% |
| -5.03% |
| -0.02% |
| GRMN |
| 0.40% |
| 0.00% |
| 0.00% |
| ROL |
| 0.37% |
| -9.64% |
| -0.04% |
| -5.75% |
| -5.48% |
You will notice that two of the top seven holdings enjoyed very favorable returns last month when compared to the S&P 500. AbbVie ( ABBV ) finished the month up 0.27%, contributing 0.02% of the portfolios target return. And Merck ( MRK ) finished the month up 1.41%, contributing 0.09% of the portfolios target return. The two best performing holdings in November from amongst the top 7 holdings, ASML Holdings ( ASML ) and Taiwan Semiconductor Manufacturing Company Limited ( TSM ), performed rather poorly losing 10.15% and 9.71% respectively. The remaining three top 7 holdings posted losses ranging from 2.43% to 4.26%, in turn generating minor alpha for the portfolio.
The best performing component of the portfolio in December was Ferguson PLC ( FERG ) that finished the month with a gain of 8.95%. Additionally the portfolio benefited from Lockheed Martin ( LMT ) posting a gain of 0.27% during the month.
The worst performing holding was T. Rowe Price Group ( TROW ), with a loss of 11.75%. Three more holdings finished the month with losses in excess of 11%: Infosys ( INFY ), Accenture ( ACN ) and Applied Materials ( AMAT ).
Here is a breakdown of the portfolio by top "X" number of stocks, their weight in the portfolio, average return, contribution to the portfolio return and impact on the total portfolio return.
| Breakdown |
| % of Portfolio |
| Average Return |
| Portfolio Return |
| % of Portfolio Return |
| Top 7 |
| 46.69% |
| -3.91% |
| -1.83% |
| 33.34% |
| Top 10 |
| 64.82% |
| -5.13% |
| -3.26% |
| 59.48% |
| Top 15 |
| 84.12% |
| -5.01% |
| -4.22% |
| 77.00% |
| Top 20 |
| 94.16% |
| -5.97% |
| -5.17% |
| 94.32% |
| Bottom 10 |
| 5.83% |
| -5.30% |
| -0.31% |
| 5.68% |
This data is based on the target weight and not the actual portfolio weights, however, the margin of difference is not significant. As you can see the top 10 holdings accounted for nearly 60% of the return in December. And a little more than 94% of the return can be attributed to just the top 20 holdings. Something to note here is that if I had instead opted for an equal weight allocation, the portfolio would have lost 5.75% in December. So while the initial returns have turned out to be more favorable with the capped float adjusted market capped allocation approach, I think it's too early to state that this weighing approach will be more favorable in the long run.
Here are the combined returns for each holding for the months of November and December.
| Symbol |
| Target Allocation |
| Combined |
| ASML |
| 6.67% |
| 16.01% |
| ABBV |
| 6.67% |
| 10.40% |
| TSM |
| 6.67% |
| 21.73% |
| HD |
| 6.67% |
| 7.29% |
| MA |
| 6.67% |
| 5.96% |
| V |
| 6.67% |
| 0.52% |
| MRK |
| 6.67% |
| 10.34% |
| CSCO |
| 6.61% |
| 4.87% |
| ACN |
| 6.35% |
| -6.01% |
| TXN |
| 5.17% |
| 2.86% |
| UPS |
| 4.34% |
| 4.53% |
| LOW |
| 4.30% |
| 2.20% |
| LMT |
| 3.86% |
| 0.58% |
| ADP |
| 3.56% |
| -0.71% |
| BLK |
| 3.24% |
| 10.46% |
| AMAT |
| 2.69% |
| 10.56% |
| INFY |
| 2.45% |
| -3.84% |
| LRCX |
| 1.96% |
| 4.21% |
| KLAC |
| 1.59% |
| 19.56% |
| PAYX |
| 1.35% |
| -1.67% |
| FAST |
| 0.98% |
| -2.08% |
| TROW |
| 0.83% |
| 3.83% |
| FERG |
| 0.76% |
| 16.89% |
| EXPD |
| 0.57% |
| 6.81% |
| MPWR |
| 0.54% |
| 4.38% |
| BBY |
| 0.49% |
| 18.51% |
| SWKS |
| 0.49% |
| 6.66% |
| SNA |
| 0.41% |
| 3.61% |
| GRMN |
| 0.40% |
| 5.62% |
| ROL |
| 0.37% |
| -12.89% |
A total of 9 holdings have thus far provided double digit total returns, despite many posting losses in December. The best performers are:
- TSM +21.73%
- KLAC +19.56
- BBY +18.51%
- FERG +16.89%
- ASML +16.01%
The average target allocation for the 9 double-digit return holdings is 35.44%, with 4 of these holdings having the maximum allocation weight of 6.67% in the portfolio.
6 holdings have thus far generated an overall loss for the portfolio, the 6 losers are:
- ROL -12.89%
- ACN -6.01%
- INFY -3.84%
- FAST -2.08%
- PAYX -1.67%
- ADP -0.71%
The average target allocation for these 6 positions is 15.07%, with the worst holding, Rollins, having the smallest allocation weight of just 0.37%.
Long Term Performance
As I have already mentioned the portfolio is off to a great start generating alpha in both November and December. The cumulative return for the portfolio as of month-end December was 7.04% compared to a loss of 0.49% for the S&P 500. This equates to 7.53% of alpha after the first 2 months. Even though after November my portfolio was 7.66% ahead of the S&P 500, and it posted a better return in December, the long term alpha has shrunk. This is primarily due to the compounding effect on returns.
January 2023 has started off on a bright note as well. Through January 9th my portfolio has a gain of 3.85% compared to a gain of just 1.42% for the S&P 500. This is an additional 2.44% of alpha generated during the first few trading days of the year. The early gains in January push the cumulative return for my portfolio to 11.16% compared to 0.91% for the S&P 500. As a result, the alpha of 7.53% post December increases to 10.25% as of January 9th.
I didn't expect this portfolio to do so well so quickly, but the journey for this young portfolio is long and this early lead can still fade. My hypothesis for the 4 factor stock selection strategy is that it can produce long term alpha over the S&P 500, and generate a growing passive dividend stream along the way.
Future Outlook
2023 just started, and who knows what this year has in store for quality dividend stocks. I'll take all of the gains I can get and embrace volatility with optimism that it will not last forever.
Currently the portfolio has a forward dividend yield of 2.16%, which is up from the 2.15% dividend yield a month ago. This is a direct result of the losses posted in December and valuations pushing higher in early January. The portfolio generated $2.99 in dividend income during the month of December, these dividends were reinvested in a way to reduce the allocation drift. The total dividend income generated in 2022 was $6.08. This includes dividends paid by the 4 factor strategy in November and December plus an additional $0.92 I received in this account in October from the prior asset allocation. The projected dividend income for the next 12 months is $43.62, this figure has increased from $43.43 a month ago as a result of dividend increases and dividend reinvestment. Since I am not adding any new money to the portfolio I will have a unique opportunity to track how the dividend income grows over time directly through these two factors. Once I have more dividend data it will become its own section in this article series.
For further details see:
4 Factor Dividend Growth Portfolio - December 2022 Results