This investment strategy, implemented as a '4-Factor Dividend Growth Portfolio,' has consistently demonstrated superior performance compared to the widely recognized Schwab U.S. Dividend Equity ETF (SCHD). Since its inception in November 2022, this tailored approach has generated an impressive annualized return of 14.78%, substantially exceeding SCHD's 7.34% over the same period. The core methodology involves a meticulous annual selection of 20 stocks, chosen from a pool of high-quality, growth-oriented companies based on specific financial criteria. Key factors guiding these selections include a robust free cash flow to debt ratio, a strong 5-year dividend growth rate, a high return on invested capital (ROIC), and an attractive forward yield. This disciplined approach aims to identify companies with sustainable dividend growth potential, thereby providing a compelling alternative for investors seeking enhanced returns.
The portfolio's construction leverages a rigorous, multi-faceted screening process designed to pinpoint companies exhibiting both financial health and a commitment to increasing shareholder distributions. For example, the top 20 stocks identified for December illustrate the strategy's focus on these robust metrics, boasting an average yield of 1.76%, a 5-year dividend growth rate of 21.63%, an impressive return on capital of 24.6%, and an outstanding free-cash-flow-to-debt ratio of 499.56%. Furthermore, the strategy has undergone recent modifications, integrating an 'expected rate of return' as an additional filtering mechanism. While these refinements have occasionally led to periods of enhanced outperformance, there have also been instances where the adjusted method lagged behind the original, indicating the dynamic nature and continuous optimization efforts inherent in this investment approach.
This innovative dividend growth strategy offers investors a compelling alternative to traditional index-based dividend ETFs by focusing on a select group of high-quality companies with strong fundamentals and a proven track record of dividend increases. By actively managing and refining the selection criteria, the strategy seeks to maximize total returns while maintaining a focus on sustainable income generation. The consistent outperformance against a benchmark like SCHD highlights the potential of a data-driven, factor-based approach to dividend investing, encouraging investors to look beyond conventional options for superior long-term results and fostering a proactive approach to wealth creation.