2023-10-04 13:46:01 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 fell by 6.29% in September, underperforming the S&P 500 by 1.53%. Year-to-date, the portfolio is up 6.89%.
- Since its inception, the portfolio has generated 1.90% of alpha over the S&P 500.
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.
Here is a snapshot of the actual portfolio as of October 3rd, 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]] | 0.912160 | 134.48 | 5.40 | 6.58% | 6.67% |
[[ACN]] | 0.445310 | 136.37 | 1.99 | 6.67% | 6.35% |
[[ADP]] | 0.291340 | 70.04 | 1.46 | 3.43% | 3.56% |
[[AMAT]] | 0.489580 | 66.94 | 0.63 | 3.28% | 2.69% |
[[ASML]] | 0.223530 | 127.55 | 1.72 | 6.24% | 6.67% |
[[BBY]] | 0.151950 | 10.27 | 0.56 | 0.50% | 0.49% |
[[BLK]] | 0.087470 | 54.71 | 1.75 | 2.68% | 3.24% |
[[CSCO]] | 2.859880 | 153.43 | 4.46 | 7.51% | 6.61% |
[[EXPD]] | 0.125700 | 14.32 | 0.17 | 0.70% | 0.57% |
[[FAST]] | 0.364810 | 19.77 | 0.51 | 0.97% | 0.98% |
[[FERG]] | 0.108560 | 17.42 | 0.53 | 0.85% | 0.76% |
[[GRMN]] | 0.073540 | 7.61 | 0.21 | 0.37% | 0.40% |
[[HD]] | 0.433760 | 126.63 | 3.63 | 6.20% | 6.67% |
[[INFY]] | 2.713840 | 46.14 | 1.09 | 2.26% | 2.45% |
[[KLAC]] | 0.086540 | 39.10 | 0.45 | 1.91% | 1.59% |
[[LMT]] | 0.161960 | 65.40 | 1.94 | 3.20% | 3.86% |
[[LOW]] | 0.406170 | 81.30 | 1.79 | 3.98% | 4.30% |
[[LRCX]] | 0.080980 | 50.05 | 0.65 | 2.45% | 1.96% |
[[MA]] | 0.380820 | 148.92 | 0.87 | 7.29% | 6.67% |
[[MPWR]] | 0.030340 | 13.62 | 0.12 | 0.67% | 0.54% |
[[MRK]] | 1.298850 | 132.18 | 3.79 | 6.47% | 6.67% |
[[PAYX]] | 0.216150 | 24.69 | 0.73 | 1.21% | 1.35% |
[[ROL]] | 0.142100 | 5.15 | 0.07 | 0.25% | 0.37% |
[[SNA]] | 0.028600 | 7.26 | 0.19 | 0.36% | 0.41% |
[[SWKS]] | 0.115810 | 11.24 | 0.32 | 0.55% | 0.49% |
[[TROW]] | 0.143730 | 14.39 | 0.70 | 0.70% | 0.83% |
[[TSM]] | 1.764350 | 150.69 | 3.23 | 7.38% | 6.67% |
[[TXN]] | 0.599890 | 94.33 | 3.12 | 4.62% | 5.17% |
[[UPS]] | 0.496080 | 76.27 | 3.21 | 3.73% | 4.34% |
[[V]] | 0.624460 | 142.88 | 1.12 | 6.99% | 6.67% |
September 2023 Results
With the first year finish line in sight, the portfolio lost ground to the S&P 500 Trust ETF (SPY) last month. The portfolio finished the month with a loss of 6.29% while SPY fell by only 4.77%, in turn underperforming by 1.53%. The 11-month return for the portfolio, through month-end September was 14.41%, a significant decline from the 22.10% as of month-end August. However, SPY's 11-month return sits at 12.51%, giving the portfolio a 1.90% buffer as we enter the final month of the first fiscal year for this strategy. Beating the S&P 500 is not a primary objective but it is useful to see how the portfolio fairs compared to the broad U.S. Equity Market.
Year-to-date the portfolio is up 6.89% and trailing the S&P 500 by 6.18%. The entirety of the alpha generated by this strategy came in the last two months of 2022 as the portfolio outpaced the index by 7.53%.
The average loss for all 30 holdings in this portfolio during September was 6.03%, meaning that the strategic asset allocation was further attributed to the below-average performance.
Since inception the actual allocation has drifted away from the target allocation, at the moment the absolute drift is 9.41%. Despite the lackluster performance the portfolio drift improved compared to the prior month when the absolute drift was 9.56%. 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 from September for each holding. In the table below you can see the ticker symbol for each holding, the target allocation weight, the total return for September and the respective allocation return in the portfolio.
Symbol | Target Allocation | Sep 23 | Alloc Return |
ASML | 6.67% | -10.88% | -0.73% |
ABBV | 6.67% | 1.43% | 0.10% |
TSM | 6.67% | -6.65% | -0.44% |
HD | 6.67% | -8.52% | -0.57% |
MA | 6.67% | -4.05% | -0.27% |
V | 6.67% | -6.38% | -0.43% |
MRK | 6.67% | -4.90% | -0.33% |
CSCO | 6.61% | -6.26% | -0.41% |
ACN | 6.35% | -5.15% | -0.33% |
TXN | 5.17% | -5.38% | -0.28% |
UPS | 4.34% | -7.99% | -0.35% |
LOW | 4.30% | -9.82% | -0.42% |
LMT | 3.86% | -8.79% | -0.34% |
ADP | 3.56% | -5.04% | -0.18% |
BLK | 3.24% | -7.05% | -0.23% |
AMAT | 2.69% | -9.37% | -0.25% |
INFY | 2.45% | -1.50% | -0.04% |
LRCX | 1.96% | -10.49% | -0.21% |
KLAC | 1.59% | -8.61% | -0.14% |
PAYX | 1.35% | -5.65% | -0.08% |
FAST | 0.98% | -5.11% | -0.05% |
TROW | 0.83% | -5.52% | -0.05% |
FERG | 0.76% | 1.80% | 0.01% |
EXPD | 0.57% | -1.78% | -0.01% |
MPWR | 0.54% | -11.16% | -0.06% |
BBY | 0.49% | -7.95% | -0.04% |
SWKS | 0.49% | -9.33% | -0.05% |
SNA | 0.41% | -5.04% | -0.02% |
GRMN | 0.40% | -0.09% | -0.00% |
ROL | 0.37% | -5.65% | -0.02% |
-6.03% | -6.19% |
28 out of the 30 stocks in this portfolio saw a negative return last month but still only 3 stocks remain in the red since inception. Notably a handful are sitting on rather low 11-month returns and may turn red should we see the market sell-off once again in October.
Here is a breakdown of the portfolio by the 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% | -5.71% | -2.66% | 43.07% |
Top 10 | 64.82% | -5.67% | -3.68% | 59.54% |
Top 15 | 84.12% | -6.36% | -5.20% | 84.05% |
Top 20 | 94.16% | -6.55% | -5.91% | 95.49% |
Bottom 10 | 5.83% | -4.98% | -0.28% | 4.51% |
This data is based on the target weight and not the actual portfolio weights, however, the margin of difference is not significant.
We can see that the top 10, or the core holdings, performed slightly better than the portfolio as a whole. It was predominantly positions 11 through 20, based on allocation weight, that drove the portfolio further into the red. The smallest 10 positions, collectively, actually performed the best.
Here are the combined returns for each holding since November 2022.
Symbol | Target Allocation | Combined |
ASML | 6.67% | 25.92% |
ABBV | 6.67% | 4.89% |
TSM | 6.67% | 44.09% |
HD | 6.67% | 4.80% |
MA | 6.67% | 21.21% |
V | 6.67% | 11.94% |
MRK | 6.67% | 4.47% |
CSCO | 6.61% | 21.09% |
ACN | 6.35% | 9.42% |
TXN | 5.17% | 1.15% |
UPS | 4.34% | -3.66% |
LOW | 4.30% | 8.22% |
LMT | 3.86% | -13.76% |
ADP | 3.56% | 1.68% |
BLK | 3.24% | 2.99% |
AMAT | 2.69% | 58.32% |
INFY | 2.45% | -7.42% |
LRCX | 1.96% | 56.86% |
KLAC | 1.59% | 46.81% |
PAYX | 1.35% | 0.34% |
FAST | 0.98% | 15.28% |
TROW | 0.83% | 3.22% |
FERG | 0.76% | 53.05% |
EXPD | 0.57% | 18.57% |
MPWR | 0.54% | 37.22% |
BBY | 0.49% | 6.50% |
SWKS | 0.49% | 17.48% |
SNA | 0.41% | 17.85% |
GRMN | 0.40% | 22.97% |
ROL | 0.37% | -10.10% |
After some more volatility last month, we now have only 15 out of the 30 stocks seeing double-digit total returns. That's 5 fewer than a month ago. This is still pretty exceptional given that we are 11 months into the first year for this strategy. Here are the best performers:
- AMAT +58.32%.
- LRCX +56.86%.
- FERG +53.05%.
- KLAC +46.81%.
- TSM +44.09%.
The average return of the top 7 holdings is 16.76% compared to an average return of 16.05% for all 30 positions. So the largest 7 positions continue to outperform the portfolio as a whole. Once again suggesting there may be some merit to the strategic asset allocation that was used.
3 holdings have thus far generated an overall loss for the portfolio, the list remains unchanged from a month ago. The losers are:
- LMT -13.76%.
- ROL -10.10%.
- INFY -7.42%.
The target allocation for these 3 positions is 6.69%, and their inclusion is costing the portfolio approximately 0.75% in total return. Definitely not a major setback.
Long-Term Performance
The portfolio trailed the S&P 500 by 0.19% in Quarter 1 (7.31% to 7.50%). Quarter 2 was even worse; the portfolio finished the quarter 4.38% behind the S&P 500 (4.36% to 8.74%).
Quarter 3 got off to the same poor start, but fortune tipped in the portfolio's favor in August. However, ultimately, the portfolio has to yield another quarterly loss to SPY. The portfolio trailed the S&P 500 by 1.29% in Quarter 3 (-4.56% to -3.27%). October will be the last month for the portfolio at its current structure, as it will be rebalanced on November 1st with new constituent stocks. 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.
Since its inception, the portfolio has been generating alpha over the S&P 500. After September the alpha decreased from 3.95% a month ago to 1.90%. I think that is still a comfortable cushion going into the final month of fiscal year number 1. Since inception the portfolio is up 14.41%, which, as of right now remains ahead of my 12% annualized target rate of return.
Dividend Review
Currently, the portfolio has a forward dividend yield of 2.27%, which is up from the 2.09% dividend yield a month ago. This is primarily driven by the negative return observed during September for 28 out of the 30 holdings. The portfolio generated $2.77 in dividend income during the month of September, these dividends were reinvested in a way to reduce the allocation drift. The total dividend income generated in 2022 was $6.08, and $32.72 in 2023 through the month end September.
The projected dividend income for the next 12 months is $46.41; this figure has increased from $46.12 a month ago as a result of changes in dividend rates and dividend reinvestment. The portfolio has exposure to a few foreign positions whose dividend stream is subject to currency fluctuations. 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.
The average dividend increase in the portfolio has been 13.06%, or 7.16% at the portfolio level factoring in individual stock weights and 0% increases for the stocks that have not raised their dividend yet. This figure may still increase in the current month and it'll be interesting to see where we finish at the end of the first fiscal year.
Observations Made During First 11 Months
I updated my long-term return figures for all 30 chosen stocks through September, extending the amount of data to 11 months. The base case for adopting an equal weight allocation as opposed to using a capped float adjusted market cap allocation still stands, and the margin of difference has marginally increased from 1.89% to 1.97%.
If you happened to read my past updates, you may recall that the first insight I made about this strategy was that stocks that ranked better in the 4-factor test have been generating higher returns compared to lower-ranked stocks. And perhaps adopting the allocation methodology of SCHD was not the optimal route to take.
Between November 2022 and September 2023, the average total return for the 15 highest-ranked stocks using the 4-factor stock selection process was 18.97%. Whereas the next 15 stocks (positions 16-30) had an average return of just 13.13%. If we break these average returns down further, the top 5 ranked stocks had an average gain of 17.81%, stocks ranked 6 through 10 had an average gain of 8.10% and stocks ranked 11 through 15 had an average gain of 32.45%.
The average return of the top 20 ranked stocks during the last 11 months was 18.48% which is nearly 4% higher than the return of the actual portfolio. Not only would investing in 20 stocks be easier, adopting an equal weight allocation would also be simpler.
The next re-constitution for this strategy is coming up pretty quickly, at the end of October I will run the 4 factor stock screener again to see which stocks will be part of next year's portfolio. I have decided to make the following changes to the structure of the portfolio for fiscal year 2. Instead of selecting the top 30 stocks I will trim the list to just the top 20 stocks. Additionally I will no longer use the capped float adjusted market capitalization to set the initial asset allocation. Instead I will use an equal weight approach with each stock representing a 5% allocation in the portfolio. I am also debating about rebalancing the portfolio on a monthly basis. Seeing how the actual portfolio is held in a Traditional IRA account, there would be no tax consequences from such a rebalancing schedule.
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 article.
Here are the criteria for the initial stock screener:
- Payout Ratio of 80% or less.
- 3 & 5-year Dividend Growth Rate of at least 5%.
- 5-Year Revenue and EPS Growth Rate of at least 5%.
- Stock must trade on the NYSE or NASDAQ.
- Wide or Narrow Economic Moat.
- Exemplary or Standard Stewardship Rating.
I ran this screener on September 30th and 135 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 20 ideas. The list is presented below with data shown as of September 30, 2023.
Rank | Symbol | FCF/Debt | 5Y DGR | ROC | FWD Yield | Prior Month | Change |
1 | [[SQM]] | 75.52% | 39.54% | 43.10% | 5.31% | 1 | 0 |
2 | [[EOG]] | 331.38% | 35.54% | 23.82% | 2.55% | 2 | 0 |
3 | [[WSM]] | 99.56% | 15.42% | 29.01% | 2.33% | 3 | 0 |
4 | INFY | 281.04% | 14.08% | 24.00% | 2.51% | 4 | 0 |
5 | TXN | 65.67% | 14.87% | 22.16% | 3.27% | 6 | 1 |
6 | FAST | 202.20% | 13.25% | 23.61% | 2.52% | 7 | 1 |
7 | ADP | 118.83% | 13.62% | 41.10% | 2.05% | 5 | -2 |
8 | [[RHI]] | 333.66% | 11.60% | 23.39% | 2.62% | 8 | 0 |
9 | PAYX | 229.60% | 9.65% | 30.60% | 3.04% | 9 | 0 |
10 | HD | 39.68% | 15.47% | 29.10% | 2.75% | 10 | 0 |
11 | [[ODFL]] | 1974.16% | 35.64% | 28.10% | 0.39% | 11 | 0 |
12 | LRCX | 98.66% | 22.99% | 26.52% | 1.27% | 13 | 1 |
13 | MPWR | 5212.13% | 27.80% | 20.36% | 0.89% | 12 | -1 |
14 | [[MAS]] | 33.99% | 22.00% | 25.40% | 2.10% | 15 | 1 |
15 | ASML | 138.02% | 29.95% | 33.73% | 0.55% | 14 | -1 |
16 | [[LSTR]] | 420.86% | 16.83% | 24.91% | 0.74% | 16 | 0 |
17 | [[AVGO]] | 45.35% | 21.32% | 16.63% | 2.21% | 17 | 0 |
18 | [[CNS]] | 129.07% | 7.83% | 22.51% | 3.67% | 18 | 0 |
19 | UPS | 45.40% | 12.38% | 17.39% | 4.17% | 20 | 1 |
20 | [[MCHP]] | 62.25% | 15.28% | 15.74% | 2.09% | 19 | -1 |
For further details see:
4 Factor Dividend Growth Portfolio: First Year Is Coming Down To The Wire