Our philosophy stems from the belief that (a) great businesses that adopt a meaningful dividend-growth capital allocation preference can generate wonderful investing outcomes over time, (b) dividends are a more reliable part of total return than capital gains, and (c) investing in smaller capitalization companies provides the opportunity to gain exposure to less efficient components of the stock market.
We aim to maximize yield while seeking to protect principal, the income stream, or long-term total return potential. Our strategy is guided by three principles:
Most dividend investing is narrowly focused on maximizing yield, which results in sector concentration, ownership stakes in deteriorating businesses, and ignoring funding and business risks. Our SMID Dividend Strategy is about owning great businesses that happen to have great dividend policies, be smaller in size, and holding them for the long term.
We will invest in stocks (small and mid cap, domestic, and dividend-paying), preferred stocks (super high-quality, small and mid cap, domestic companies that may or may not pay a dividend), and Exchange Traded Funds (or ETFs). Our market capitalization ceiling is set dynamically by the largest company in the strategy’s benchmark, the S&P MidCap 400 (which has recently been $13 billion). Holdings will be combined in an effort to achieve the objective, uphold our philosophy, and provide diversification.
The SMID Dividend Strategy will typically hold 25-45 investments and be near fully-invested at all times. We seek to achieve diversification the following ways:
We believe a portfolio built upon core “Foundational” dividend payers, augmented with “Complementary” dividend growers, and topped off with occasional “Opportunistic” positions has the best chance of achieving the SMID Dividend Strategy’s objective and goals. In addition, this stylistic diversification affords the ability to construct a portfolio with a total return profile driven by dividend growth, supported by dividend yield, and exposed to capital appreciation potential.
Our investments will be chosen based on in-depth, bottom-up, fundamental research and a commitment to respecting the Strategy’s goals and objectives. Our research will be pointed at identifying wonderful smaller businesses that have adopted a capital allocation policy committed to dividends. We give particular care to:
Ultimately, we will select a mix of investments that have an attractive combination of dividend growth potential and dividend yield to drive satisfactory total returns over time. We seek to pay reasonable prices for these investments.
The strategy will typically have 25-45 positions that vary in size based on their style classification and dividend growth-plus-yield attractiveness.
|Style||Typical Portfolio Weight||Maximum Portfolio Weight||Typical Position Size||Position Size Maximum|
Foundational holdings are those which we expect remarkably resilient operational performance and therefore have a high degree of confidence in our assessment of dividend growth and dividend reliability. These positions, therefore, will support larger allocations. Complementary holdings are subject to the same level of analysis and held to the same high standards, but the nature of their operations or dividend profiles leave us less confident in our assessment of dividend growth or dividend reliability. Accordingly, these positions will be restricted to smaller allocations. Opportunistic holdings won’t generally fit the Foundational or Complementary framework, will be used sparingly, and will be awarded smaller allocations.
Given our preference for high quality businesses trading at reasonable prices, we expect the SMID Dividend Strategy to exhibit low turnover. Within our style characterization, we anticipate slightly higher turnover for Opportunistic than Complementary positions, and slightly higher turnover for Complementary than Foundational positions.
We will make adjustments to the portfolio over time as new information about each company’s business and dividend prospects becomes available. We look to add to positions in businesses with improving competitive positions, business performance financial profiles, and payout philosophies which in turn improve the prospects for the dividend’s growth and reliability. We will sell positions in businesses with deteriorating competitive positions, business performance, financial profiles, and payout philosophies likely to negatively impact the dividend’s growth and reliability.
We may trim or add to positions in an effort to achieve more balanced sector and business risk diversification. However, we will not mechanically sell a position that exceeds our position size maximum guideline. Business, quality, and dividend considerations will always remain the primary drivers of position management actions. However, in the event a sector accounts for more than 35% of total assets, we will take appropriate measures to reduce holdings in this sector and in a manner consistent with our investment tenets and prudent management.
The value of investments in the SMID Dividend Strategy may increase or decrease, which will cause the value of the investor’s portfolio to increase or decrease. Investors may lose money on their investment and there can be no assurance that the strategy will achieve its investment objective and goals.
We define risk as the permanent loss of capital. Our primary efforts to manage risk will center around (1) paying reasonable prices for companies that meet the criteria laid out above and (2) avoiding dividend cuts at all costs.
The principal risks inherent in this strategy are:
There is no guarantee that the issuers of the stocks will declare dividends in the future or that, if dividends are declared, they will remain at their current levels or increase over time. High-dividend stocks may not experience high earnings growth or capital appreciation. A Client's performance during a broad market advance could suffer because dividend paying stocks may not experience the same capital appreciation as non-dividend paying stocks.
The stock of any company may not perform as well as expected, and may lose value, because of factors related to the company, including adverse developments regarding the company's business, poor management decisions, or changes in the company's industry or popularity of its goods and services. In the event a company becomes insolvent, stock holders will generally have lowest priority among owners of that company's obligations as to the distribution of the company's assets. Stocks may also be affected by general market and economic factors, even when their companies' respective business fundamentals are unchanged.
Small and Mid Capitalization Companies
The securities of smaller companies may involve greater risks than do those of larger, more established companies, because the small companies may, for example, lack the management experience, financial resources, product diversification and competitive strength of larger companies, and their trading may be more volatile.
Please see Appendix A to our Investment Advisory Agreement for a discussion of additional risk associated with this strategy.
Each Personal Portfolio is subject to an account minimum, which varies based on the strategies included in the portfolio. Motley Fool Wealth Management retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients, and we may modify allocations within a client's account subject to the constraints of each client's current risk score and objective. Clients should be aware that their individual account results may not exactly match the performance of the Model Portfolios.