INFY - 4 Factor Dividend Growth Portfolio - Off To A Great Start Again

2023-12-05 03:21:21 ET

Summary

• The 4-factor dividend growth portfolio is a strategy that leverages the stock selection process of Schwab U.S. Dividend Equity ETF, with a few minor twists.
• The portfolio returned 11.02% in November, outperforming the S&P 500 by 1.89%. Year-to-date, the portfolio is up 17.46%.
• Since its inception, the portfolio has generated 4.00% of alpha over the S&P 500, on an annualized basis.

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 4-Factor Dividend Growth Portfolio . In a nutshell, the strategy leverages the stock selection process of Schwab U.S. Dividend Equity ETF™ ( SCHD ), or rather its underlying index, the Dow Jones 100 Dividend Index ( DJUSDIV ), 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.

On November 1, 2023 I rebalanced this portfolio with 25 newly selected stocks using the 4-factor strategy.

Here is a snapshot of the actual portfolio as of December 1st, 2023, including each position, the number of shares, current market value, estimated annual dividend, current allocation, and target allocation.

November 2023 Results

The portfolio kicks off fiscal year 2 the same way it started its initial journey 13 months ago, with a bang! Equities took off like a rocket in November posting exceptional returns. The S&P 500 posted a very nice gain of 9.13%, my portfolio on the other hand posted an even more impressive gain of 11.02%, outpacing the index by 1.89%. Since inception the portfolio has a CAGR of 21.16% and is outperforming the S&P 500 by 2.65%. Beating the S&P 500 is not a primary objective but it is useful to see how the portfolio fares compared to the broad U.S. Equity Market.

The portfolio also got off to a nice start in December, granted we have only had one trading day thus far. The portfolio was up 2.12% while the S&P 500 only moved 0.60% higher.

Year-to-date the portfolio is up 17.46% and trailing the S&P 500 by 4.06%. The entirety of the alpha generated by this strategy in fiscal year one came in the first two months as the portfolio outpaced the index by 7.53%. It's interesting to see a similar pattern start to develop in fiscal year two.

The average gain for all 25 holdings in November was 10.48%. You may be wondering why the portfolio return exceeds the average return of all holdings, given that each position is equal weighed at 4%. There are two explanations for this. The portfolio was rebalanced to its current 25 holdings while the market was open on November 1st. Therefore there was some minimal exposure to the old holdings the morning of November 1st, and the portfolio picked up some additional return. Additionally the dividend income in November was largely based on the prior asset allocation and that had an impact on the monthly return as well.

Since the portfolio is rebalanced each month there is no more drift to report.

Individual Returns and Variations

Here are the individual returns from November for each holding. In the table below you can see the ticker symbol for each holding, the target allocation weight, the total return for November, and the respective allocation return in the portfolio.

24 out of the 25 stocks had a positive return last month which was better than what we observed during the past 3 months.

Here are the best performers:

1. WSM +24.83%
2. MPWR +24.22%
3. LRCX +21.71%
4. MCHP +17.67%
5. MAS +16.84%

Breaking down the returns by the original ranking of the top 25 holdings chosen for inclusion in the portfolio, we can see that it's the mid-ranked stocks that have gotten off to the best start.

In fiscal year one there was a clear correlation that higher ranked stocks performed better than their lower ranked counterparts. Thus far this isn't the case in fiscal year two, however things can still change during the course of the next 11 months.

Long-Term Performance

The portfolio achieved a 10.90% return in fiscal year one, outperforming the S&P 500 by 0.75%. The return for fiscal year two (Nov. 1, 2023 - Dec. 1, 2023) is 13.37% and places the portfolio 3.59% ahead of the S&P 500. On an annualized basis the portfolio has a return of 21.68% versus 17.68% for the S&P 500, resulting in 4% of annualized alpha over the index.

Given that the inspiration for this strategy and portfolio was SCHD it's only fair that I compare the returns the portfolio attains to those of SCHD. SCHD has not performed well during the past 13 months, the margin of outperformance thus far been exceptional. The return for SCHD during fiscal year one (Nov. 2022 to Oct. 2023) was -4.51%, my portfolio outperformed SCHD by 15.41%. SCHD's return during November 2023 was 6.3%, my portfolio outperformed by 4.72%. Since inception my portfolio is beating SCHD by 18.23% on an annualized basis.

What I would like to see from this strategy is a strong total return (12% CAGR) over a long period of time, say 5 to 10 years. Fiscal year one came up a little short of this threshold but things are back on track in fiscal year two.

Dividend Review

Currently, the portfolio has a forward dividend yield of 2.20%, which is down from the 2.53% dividend yield a month ago. This is primarily driven by the excellent gains observed during November. The portfolio generated $7.96 in dividend income during the month of November, these dividends were reinvested in a way to reduce the allocation drift. The total dividend income generated in 2022 was $6.08, and $44.09 in 2023 through month end November. Dividend income in fiscal year one was $42.21, fiscal year two should be significantly higher. The $7.96 in dividends received during November was equivalent to 18.86% of total fiscal year one dividends, it'll be interesting to see how long it takes for fiscal year two to surpass fiscal year one.

The projected dividend income for the next 12 months is $54.01; this figure has decreased from $57.45 a month ago as a result of the recent rebalancing. I'll be curious to see what impact the monthly rebalancing will have on potentially missed dividend income. 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 dividend growth and dividend reinvestment.

New 4 Factor List

Since month-end May, I have been running the 4 factor stock screener on a monthly basis and tracking the list of top-ranking stocks. I want to accumulate this data to run additional tests on more frequent rebalancing and to document how much the list changes from month to month.

Compiling the list is a 2 step process; the first part is generating a shortlist of dividend growth stocks; the second step is ranking them based on the 4 factors.

I will be sharing the performance results of that list as well as the three other 4 Factor Strategies I am tracking in a separate series. But I will continue sharing the top 25 chosen stocks for this strategy each month in this series.

Here are the criteria for the initial stock screener:

1. Payout Ratio of 80% or less.
2. 3 & 5-year Dividend Growth Rate of at least 5%.
3. 5-year Revenue and EPS Growth Rate of at least 5%.
4. Stock must trade on the NYSE or NASDAQ.
5. Wide or Narrow Economic Moat.
6. Exemplary or Standard Stewardship Rating.

I ran this screener on November 30th and 132 unique dividend growth stocks were selected for further analysis. I then applied the 4-factor stock selection process and narrowed the list down to just the top 25 ideas. The list is presented below with data shown as of November 30, 2023.

For further details see: