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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 December 8th, 2022 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 |
141.33 |
5.04 |
6.98% |
6.67% |
|
ACN |
0.425040 |
124.18 |
1.90 |
6.14% |
6.35% |
|
ADP |
0.275970 |
71.77 |
1.38 |
3.55% |
3.56% |
|
AMAT |
0.489580 |
53.17 |
0.51 |
2.63% |
2.69% |
|
ASML |
0.223530 |
135.66 |
1.48 |
6.70% |
6.67% |
|
BBY |
0.151950 |
12.67 |
0.53 |
0.63% |
0.49% |
|
BLK |
0.085800 |
60.36 |
1.67 |
2.98% |
3.24% |
|
CSCO |
2.859880 |
140.11 |
4.35 |
6.92% |
6.61% |
|
EXPD |
0.125700 |
13.56 |
0.17 |
0.67% |
0.57% |
|
FAST |
0.364810 |
18.67 |
0.45 |
0.92% |
0.98% |
|
FERG |
0.108560 |
13.69 |
0.38 |
0.68% |
0.76% |
|
GRMN |
0.073540 |
7.03 |
0.21 |
0.35% |
0.40% |
|
HD |
0.421060 |
136.46 |
3.20 |
6.74% |
6.67% |
|
INFY |
2.423620 |
47.45 |
0.97 |
2.34% |
2.45% |
|
KLAC |
0.086540 |
34.26 |
0.45 |
1.69% |
1.59% |
|
LMT |
0.161960 |
78.61 |
1.94 |
3.88% |
3.86% |
|
LOW |
0.406170 |
82.68 |
1.71 |
4.09% |
4.30% |
|
LRCX |
0.080980 |
36.85 |
0.56 |
1.82% |
1.96% |
|
MA |
0.380820 |
133.73 |
0.75 |
6.61% |
6.67% |
|
MPWR |
0.030340 |
11.69 |
0.09 |
0.58% |
0.54% |
|
MRK |
1.298850 |
143.98 |
3.79 |
7.11% |
6.67% |
|
PAYX |
0.216150 |
25.97 |
0.68 |
1.28% |
1.35% |
|
ROL |
0.142100 |
5.58 |
0.07 |
0.28% |
0.37% |
|
SNA |
0.028600 |
6.70 |
0.19 |
0.33% |
0.41% |
|
SWKS |
0.115810 |
11.02 |
0.29 |
0.54% |
0.49% |
|
TROW |
0.143730 |
17.57 |
0.69 |
0.87% |
0.83% |
|
TSM |
1.764350 |
142.56 |
3.14 |
7.04% |
6.67% |
|
TXN |
0.571720 |
100.83 |
2.84 |
4.98% |
5.17% |
|
UPS |
0.473580 |
85.07 |
2.88 |
4.20% |
4.34% |
|
V |
0.624460 |
130.57 |
1.12 |
6.45% |
6.67% |
November 2022 Results
November was a good month for equities in general with the S&P total return being +5.59%. The 4 factor portfolio returned 13.25% generating 7.66% of alpha during its first month. Quite an optimistic start with a sizable cushion for the long fiscal year ahead. This could very well be a lucky return as several of the holdings in the portfolio experienced above average gains due to favorable news. Whether the strong return was in part due to luck or a direct result of the stock selection process is difficult to determine at this point. Regardless, I will take the alpha and optimistically wait for more in the months to come.
The portfolio is top heavy, with the 7 largest holdings making up 46.69% of the target allocation. These 7 positions enjoyed an above average return in November of 15.21%. The 10 largest holdings make up 64.82% of the target allocation and had an average return of 13.43% last month.
I was not able to start this portfolio exactly at the target allocation due to limited capabilities of my broker. The initial drift was minimal and it led to 48 basis points of attribution over the target allocation. Had I been able to launch the portfolio at market open on November 1st with each position being perfectly in-line with the target weight, the portfolio would have finished November with a gain of 12.77% (versus the actual return of 13.25%). I think this variance will not always be favorable for the portfolio as the allocation drift continues increase every day. As of December 8th the portfolio is 4.11% away from target on an absolute basis.
Individual Returns and Variations
Here are the individual returns for 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 for the portfolio.
|
Symbol |
Target Allocation |
Nov 22 |
Alloc Return |
|
ASML |
6.67% |
29.12% |
1.94% |
|
ABBV |
6.67% |
10.10% |
0.67% |
|
TSM |
6.67% |
34.82% |
2.32% |
|
HD |
6.67% |
10.05% |
0.67% |
|
MA |
6.67% |
8.60% |
0.57% |
|
V |
6.67% |
4.99% |
0.33% |
|
MRK |
6.67% |
8.81% |
0.59% |
|
CSCO |
6.61% |
9.44% |
0.62% |
|
ACN |
6.35% |
6.00% |
0.38% |
|
TXN |
5.17% |
12.35% |
0.64% |
|
UPS |
4.34% |
14.09% |
0.61% |
|
LOW |
4.30% |
9.03% |
0.39% |
|
LMT |
3.86% |
0.31% |
0.01% |
|
ADP |
3.56% |
9.28% |
0.33% |
|
BLK |
3.24% |
10.85% |
0.35% |
|
AMAT |
2.69% |
24.44% |
0.66% |
|
INFY |
2.45% |
8.65% |
0.21% |
|
LRCX |
1.96% |
16.70% |
0.33% |
|
KLAC |
1.59% |
24.67% |
0.39% |
|
PAYX |
1.35% |
5.54% |
0.08% |
|
FAST |
0.98% |
6.58% |
0.06% |
|
TROW |
0.83% |
17.66% |
0.15% |
|
FERG |
0.76% |
7.29% |
0.06% |
|
EXPD |
0.57% |
19.29% |
0.11% |
|
MPWR |
0.54% |
12.52% |
0.07% |
|
BBY |
0.49% |
24.69% |
0.12% |
|
SWKS |
0.49% |
11.92% |
0.06% |
|
SNA |
0.41% |
9.10% |
0.04% |
|
GRMN |
0.40% |
5.62% |
0.02% |
|
ROL |
0.37% |
-3.60% |
-0.01% |
|
12.30% |
12.77% |
You will notice that two of the top seven holdings enjoyed very favorable returns in November. ASML Holdings (ASML) finished the month up 29.12%, contributing 1.94% of the portfolios target return. And Taiwan Semiconductor (TSM) finished the month up 34.82%, contributing 2.32% of the portfolios target return. In total the top 7 holdings contributed more than half of November return for the portfolio and they will continue to be the driving force of future alpha.
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% |
15.21% |
7.10% |
55.61% |
|
Top 10 |
64.82% |
13.43% |
8.75% |
68.48% |
|
Top 15 |
84.12% |
11.86% |
10.44% |
81.74% |
|
Top 20 |
94.16% |
12.89% |
12.10% |
94.77% |
|
Bottom 10 |
5.83% |
11.11% |
0.67% |
5.23% |
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 70% of the return in November. And nearly 95% of the return can be attributed to just the top 20 holdings. Even though the bottom 10 holdings enjoyed a nice spell in November, on average returning 11.11%. Their weight in the portfolio (5.83% at target) meant that these 10 stocks did not have a major impact on the portfolio as a whole. Something to note here is that if I had instead opted for an equal weight allocation, the portfolio would have returned 12.3% in November. So while the first month 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.
Only 1 out of the 30 holdings in this portfolio, Rollins (ROL), had a negative return in November. The stock finished last month with a loss of 3.6%, and given the very small allocation weight (0.37%) in the portfolio the overall impact was a loss of just 1 basis point.
Future Outlook
The quarter 4 market rally has lost a little steam in early December. The S&P 500 total return through December 8th is -2.81%. The 4 factor portfolio is down only 1.42% thus far, which is another 1.39% of alpha over our benchmark. The combined running total return for the portfolio as of December 8th is 11.64% versus just 2.62% for the S&P. That’s a healthy lead of 9.02%, however I expect that this portfolio will not see alpha in every month during the first year. The main question on my mind is where will this portfolio be on October 31, 2023? I think next year may be quite turbulent as the Fed will likely continue raising interest rates and several news outlets are calling the 2023 recession “inevitable”. I would like to see this portfolio finish its first fiscal year with a positive total return, and for that return to be better than the S&P total return.
Currently the portfolio has a forward dividend yield of 2.15%, which is down from the 2.33% dividend yield at inception. This is a direct result of the strong gains observed in November. The portfolio generated $2.17 in dividend income during the month of November, these dividends were reinvested in a way to reduce the allocation drift. Thus far two holdings have announced dividend increases. Ferguson PLC (FERG) announced a 27.27% dividend hike and Merck (MRK) announced a 5.8% dividend hike. The projected dividend income for year 1 is $43.43, however this figure will likely increase 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 increases and reinvestment.
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