Every year I like to change how I screen for my future undervalued stock purchases. For my 2021 Dividend Growth Screen I started with those companies with 20+ years of dividend growth history and then screened against the following metrics:
Company has to have a P/E under 20; and
Dividend Yield over 2%; and
Payout Ratio under 50% and
Positive Growth for the past 5 years
For my 2022 Dividend Growth Screen I started with those companies that have increased their dividend for 15 years (instead of 20) and then tightened my margin of safety:
Company has to have a P/E under 15; and
Price to Free Cash Flow under 20; and
Earnings per share positive for past 5 years; and
Positive Growth for the past 5 years; and
Payout Ratio under 30%
With a new year upcoming I am excited to come up with my 2023 investing strategy. For the first time in as long as I can remember I am going to make a radical change. Instead of screening stocks monthly or quarterly I am going to name and define particular ETFs today that I will buy throughout 2023.
Why I am Going from Single Stock Picking to ETFs for 2023
I have been screening and purchasing individual companies for as long as I can remember, however, recently I have been giving some thought to the idea of creating a more robust foundation. Specifically, the idea would be that over the next year I can build a few nice positions in the ETFs below giving me some exposure to stocks that I overlooked. Of course, this comes with the negative that maybe I should be overlooking that particular company. In addition, it will provide further stability and (likely) reduced beta to the portfolio as a whole.
I am absolutely worried that this approach will bore me. I like screening for stocks and then buying positions, but I get enough of my “kicks” from the selling naked puts that this shouldn’t be a problem for 365 days.
My 2023 Dividend ETFs Purchases
For the 2023 calendar year, I am going to use the proceeds of my naked puts to buy the following ETFS. My goal is to have two main ETFs (SCHD and VIG) and then smaller positions in an International Dividend Growth Fund (VIGI) and a small cap dividend growth fund (SMDV).
There seems to be almost an infinite amount of ETFs with the word dividend within them, so I don’t have the particular resources, patience, or knowledge to filter all of them and put them in any type of discernable ranking. As such, my research is leading me to these few that seem to be popular within the community.
Schwab U.S. Dividend Equity ETF (SCHD)
I found a great description of the fund and the underlying index it is based on:
SCHD is based on the Dow Jones US Dividend 100 Index. I would summarize the index’s stock-picking methodology as three basic filters, presented below in the order of their sequential importance:– Dividend Growth Record: SCHD first requires holdings to have at least 10 years of consecutive dividend payments as well as 5 years of consecutive dividend growth.
– Quality: SCHD next filters for quality factors like relatively low debt, high free cash flow as a share of debt, and high return on equity.
– Yield: Only after filtering down to companies with the required dividend histories and quality factors does SCHD weight by dividend yield.
With an expense ratio of only .06% I like that I am getting some exposure to companies that I wouldn’t have otherwise had exposure as their dividend growth record is at 5 years.
* Should be noted that I do own some shares going into 2023 in this fund.
Vanguard Dividend Appreciation ETF (VIG)
Seeks to track the S&P Dividend Growers Index whose goal is,
The S&P Dividend Growers Indices focus on companies that have a history of consistently increasing dividends over multiple, consecutive years (10 years for the U.S. index and 7 years for the Global ex-U.S. index). Put simply, a company’s ability to reliably boost dividends for multiple years should be an indication of a certain amount of financial strength and discipline
Not all yields are created equal. A company’s dividend yield is calculated as its dividends divided by the company’s stock price. It is possible that a company earns a high dividend yield moniker simply through price underperformance, rather than as a result of growing its dividends. The S&P Dividend Growers Indices attempt to avoid these yield traps by excluding the top 25% of the highest-yielding eligible companies.
Again the expense ratio is low at 0.06%, and like SCHD I own a few shares of this fund already.
Vanguard International Dividend Appreciation (VIGI)
Like VIG (and most other Vanguard funds) it follows an index,
The S&P Global Ex-U.S. Dividend Growers Index is designed to measure the performance of non-U.S. global companies that have followed a policy of consistently increasing dividends every year for at least 7 consecutive years. The index excludes the top 25% highest yielding eligible companies from the index.
With a low expense ratio of .15% it just provides me with even more exposure the other two would not have.
Russell 2000 Dividend Growers (SMDV)
Last but not least is trying to get exposure to some smaller companies that still have a history of increasing their dividend without the massive market cap of the first two funds. Not all trees grow to be redwoods but can still provide a lot of value. According to proshares,
The index targets companies that are currently members of the Russell 2000 Index and have increased dividend payments each year for at least 10 years. The index contains a minimum of 40 stocks, which are equally weighted. No single sector is allowed to comprise more than 30% of the index’s weight. If there are fewer than 40 stocks with at least 10 consecutive years of dividend growth, the index will include companies with shorter dividend growth histories. The index is rebalanced each March, June, September and December, with an annual reconstitution during the June rebalance.
It has a bit higher of an expense ratio of .40% – not great by any means but I am interested in this fund so going to stick it out for a while.
Constructing the Portfolio
My goal is an approximate weight as follows:
- SCHD – 35%
- VIG – 35%
- VIGI – 10%
- SMDV – 20%
Since I currently own positions in SCHD and VIG for the first month or so I will start building up the other two and then refocus every few weeks to a month.
I say refocus vs rebalance because I don’t see myself actually trimming a position to buy another one, but rather putting new funds into the under-allocated fund until I get to the above goal.
Future of the Account
I really believe this account to be one of my future income streams and I am simply stepping back for one year to focus on building a strong foundation of ETFs rather than my individual picks. I would imagine that 2024+ I will get back to individual stock picks.