Overview
Philosophy
We believe earnings and dividend growth drive total return. Therefore, we focus on companies that we believe will exceed consensus earnings estimates and increase their annual dividend. We buy companies with:
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The ability to exceed consensus earnings estimates and to increase the annual dividend
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Stable to improving fundamentals
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Attractive valuations as exhibited by dividend-adjusted reward/risk ratios
Process
Benchmark : Russell 1000 Value Index
The Dividend Focus investment process is rules-based and focused on identifying companies that can produce a positive earnings surprise and increase their annual dividend. It begins with quantitative screens and a multi-factor model based on stability of earnings, dividend growth rate, growth factors and value factors.
Fundamental analysis then focuses on deriving proprietary earnings estimates, constructing a list of key merits and risks, and calculating high and low price targets, which are used to determine reward/risk ratios. Candidate stocks with the ability to exceed consensus earnings estimates and offer an attractive dividend yield with the potential for growth in the income stream that also exhibit greater upside price potential than downside price risk (dividend-adjusted reward/risk ratios above 1) are considered for further review.
The stocks are then subject to extensive risk analysis within the context of the overall portfolio.
Portfolio construction is implemented while adhering to sector and security level constraints. Ongoing monitoring and a strict sell discipline are important aspects of the overall investment process.
The multi-factor model is run daily, the portfolio and holdings are reviewed weekly during strategy sessions and stocks are re-evaluated as earnings are reported. If a security falls below our low price target and meets one of these four criteria, it will be reviewed with an intention to
sell: security scores in the bottom quintile in the multi-factor model, analyst project earnings below consensus, deterioration in near-term consensus earnings estimates into the bottom quintile of the universe based on percentage change, or potential dividend cut.
A security will also be reviewed if it exceeds our reasonable price target or the model identifies a better opportunity.
Portfolio Characteristics & Allocation¹ as of 9/30/2014
Process
Dividend Focus
Russell 3000 Index
Weighted Avg Market Cap (millions)
Price to Earnings (12-month forward)
12.3 x
12.9 x
14.2 x
13.2 x
Price to Earnings (12-month trailing)
Median Market Cap (millions)
$41,777.8
$6,057.2
$103,025.5
$108,876.8
# of Holdings
Price to Cash Flow
Dividend Yield
Return on Equity
Price to Sales
1.7 x
1.4 x
8.2 x
7.7 x
3.1%
2.4%
12.0%
16.8%
37.5%
NA
648
65
Turnover (12-month trailing)
Sector Weightings
Dividend Focus
Russell 3000 Index
Consumer Staples
Consumer Discretionary
7.5%
5.8%
6.5%
9.4%
Financials
Energy
25.5%
29.0%
15.0%
15.0%
Industrials
Healthcare
9.8%
648
13.0%
13.1%
Materials
Information Technology
3.3%
2.9%
10.0%
8.3%
Utilities
Telecom Services
4.6%
6.2%
2.6%
3.6%
1 Supplemental information. Characteristics, sector weightings, and holdings are subject to change and should not be considered as investment recommendations.
There is no guarantee that holding securities with relatively high (or low) price-to-earnings, price-to-sales, price-to-cash, return-on-equity or dividend yield will cause the portfolio to outperform its benchmark or index. Indexes are unmanaged and not available for direct investment. The views expressed herein represent the opinions of U.S. Investment & Capital Group, Inc. and are not intended as investment advice, a forecast or guarantee of future results. U.S. Investment & Capital Group, Inc. uses a proprietary methodology for the sector assignment of foreign ADRs not classified in the benchmark.
The sectors or industries discussed herein should not be perceived as investment recommendations and securities within a sector or industry may no longer be held in an account's portfolio. It should not be assumed that investments in any of the sectors or industries listed were or will prove profitable. Sector and industry weights of any particular client may vary based on investment restrictions applicable to the account. The data represents the aggregate characteristics of all securities held in the representative portfolio.
Data is obtained from FactSet® (a registered trade mark of FactSet Research Systems, Inc. and its affiliates). This information is for illustrative purposes only, is subject to change at any time, and should not be considered investment advice or a recommendation to buy or sell any particular security. Please refer to our GIPS compliant presentation, which includes performance footnotes, fee schedules, index descriptions and disclosures, located at the end of this investment strategy’s Fact Sheet (available under Quick Links).
Past performance is no guarantee of future results.