U.S. Small & Mid-Cap Dividend

Seeks a growing, safe stream of dividend income from smaller domestic companies

To learn more about our Dividend strategy, please watch the brief but insightful introductory video below...

Then simply scroll down to get a more in-depth look at everything from this strategy's goals and objectives... to who this strategy is designed for... to the particular portfolio management process it incorporates.


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U.S. Small & Mid-Cap Dividend SMA: Philosophy & Strategy

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 without jeopardizing the safety of principal, the income stream, or long-term total return potential. Our strategy is guided by three principles:

  • Business first: Own great businesses that happen to pay dividends and be smaller
  • Dividends second: Provide a safe and growing stream of cash
  • Be Foolish: Maintain a long-term, ownership mentality

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 SMA 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.

Portfolio Management Process

Portfolio Construction

The SMID Dividend SMA strategy will typically hold 25-45 investments and be near fully-invested at all times. We seek to achieve diversification the following ways:

  • Asset Type: Typically, at least 75% of the strategy’s allocation will be to high-quality, dividend-paying, domestic stocks, with a minority allocated to preferred stocks and ETFs. The common and preferred stocks will be issued by domestic companies with a market cap lower than the cap identified by the S&P MidCap 400 index. If any ETFs are owned in the strategy, they will be classified as small or mid cap on a holding-weighted market capitalization basis.
  • Sector: The portfolio will be structured to achieve adequate sector diversification, with no single sector accounting for more than 35% of assets.
  • Style: We believe stylistic diversification within the dividend-producing investment universe is important. The primary distinctions across this “style” framework are the balance between dividend yield and dividend growth and the stability of financial performance.
  • Very high-quality business
  • Sweet-spot yield (currently 2–4%) and payout (below 65%)
  • Stable financial performance
  • Very high-quality business
  • Attractive dividend growth or special dividend profile
  • Moderately stable financial performance
  • Yield-boosters — higher yield, lower dividend coverage
  • Challenged real dividend growth
  • Offer business risk or sector diversification benefits

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 SMA 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.

Investment Selection

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:

  • Dividend Safety: cash flow coverage, dividend philosophy, competitive advantage and stability of financial performance
  • Dividend Growth Potential: end market demand, cash flow growth and payout characteristics, financial flexibility, reinvestment needs
  • Attributes of the entire portfolio: dividend growth, dividend yield, sector diversification, style diversification

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.

Position Sizing

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 60% 100% 2.5–5.0% 10%
Complementary 40% 50% 1.5–3.0% 5%
Opportunistic 10% 15% 1–2% 3%

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 safety. 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 safety. 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.

Position Management

Given our preference for high quality businesses trading at reasonable prices, we expect the SMID Dividend SMA 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 safety. 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 safety.

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. As noted above, no sector will account for more than 35% of total assets.

Investment Risks

The value of investments in the SMID Dividend SMA strategy may increase or decrease, which will cause the value of the investor’s portfolio to increase or decrease. The investor 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.

Risks inherent in this strategy are:

  • Dividend income risk: Companies that issue common or preferred stocks that pay dividends are not required to continue to pay dividends, therefore, there is the possibility that a company could reduce or eliminate its dividend.
  • Potential changes to dividend tax rates: This could impact a corporation’s willingness to pay dividends.
  • Sector concentration: High dividend payers tend to cluster in certain sectors (financials, utilities, telecommunications), so it is reasonable to believe the Dividend SMA strategy will have significant exposure to these sectors at any given time.
  • Interest rate risk: Dividend stocks often compete with other income-producing investments that are linked to interest rates, if yields on those other investment choices increase the relative attractiveness of dividend paying stocks may decline.
  • Small company risk: Smaller companies have less absolute financial wherewithal to navigate changing economic, geopolitical, and competitive landscapes.
  • Liquidity risk: Smaller capitalization stocks generally have lower liquidity on major exchanges, which sometimes manifests itself as higher volatility than large capitalization stocks.

Account minimums may apply. All investments involve risk and may lose money. MFWM makes no assurance that investment objectives will be met. Clients should be aware that their individual account results may not exactly match the performance of the Model Portfolios. Past performance is no guarantee of future results.

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.

Portfolio Managers

Charly Travers Nate Weisshaar, CFA

Investment Objectives

The SMID Dividend SMA strategy seeks to provide a growing and safe stream of dividend income from smaller domestic companies.

In pursuit of this objective, the team will focus on achieving three goals, which we believe will result in better risk-adjusted returns than the benchmark over the long-term:

Offer peace of mind by owning quality smaller businesses that pay reliable dividends

Provide dividend growth above the rate of inflation to grow purchasing power

Provide a higher yield than the benchmark

Who Should Invest

This strategy fits in the small and mid-cap domestic equity slice of an asset allocation. Investors who identify as “conservative” or who prefer a “dividend growth” approach should consider the SMID Dividend SMA strategy.

Investors may prefer dividend paying equities because dividends are historically responsible for about half of long-term total stock returns, because dividend payers tend to be established and stable businesses, or because dividend stocks experience lower volatility than non-dividend payers. Regardless of the preference reason, this strategy may appeal to retirees (who withdraw dividends for living expenses) or risk-averse investors still in capital accumulation mode (who reinvest dividends).

We will select investments that are appropriate for taxable and tax-deferred account types (avoiding partnerships. While not a substitute for fixed income, this strategy can play a role in meeting income withdrawal needs as part of a larger income-based plan. It is a natural complement to our Dividend SMA strategy, which prioritizes high-quality, dividend-paying large cap domestic companies.

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