Quantigence – A Dividend Growth Investing Strategy
One question we get asked a lot is where we invest our own dollars. While we hold select tech stocks, the vast majority of our dollars have been plowed into a dividend growth strategy called Quantigence. The tools and formulas powering Quantigence have been developed over the past decade by investment professionals who have a low tolerance for risk and an admiration for investors like Warren Buffet. It’s a strategy that helps you objectively create a portfolio of dividend growth stocks that will help you sleep well at night while receiving passive income streams that grow every year. It beats inflation and the broader stock market.
The strategy is based on a “Q-score” that gets calculated for each of our dividend champions and lets you compare them to one another. These objective metrics can help alleviate the need to stock-pick. The strategy has stood the test of time, all while providing retail investors with passive income streams that grow every single year, easily outpacing inflation. When other companies think about cutting dividends, these companies think about how to increase them. The strategy provides both income growth and capital appreciation. In fact, you could say it’s an entirely different asset class.
Based on recent global developments, it seems that we’re now exiting the longest bull market in history. The portfolio we created using the Quantigence methodology remains stable in periods of market turmoil. That’s because it’s invested in major corporations that have withstood some of the worst global financial crises while not only paying, but increasing, dividends consistently for 36 years or more on average.
An investment of $10,000 twenty-five years ago would now be worth $237,000. Talk about living your golden years.
In this report, we’re going to show you exactly how we built our 30-stock dividend income portfolio. Every. Single. Step. We’ll show you how each stock can be ranked in comparison to its industry peers using proprietary “Q-scores.”
We’re going to provide you with the framework needed to create your own dividend growth portfolio. While the full Quantigence report is only available for Nanalyze Annual Premium subscribers, here is an introduction to the dividend investing strategy that provides ever-increasing dividend payments.
Introduction to Quantigence
Contrary to what your career counselor might have told you, having a “career” in finance isn’t that desirable. It’s even less desirable when you meet people who find out that you work in finance, and then they ask you the inevitable question: “So, what stock tips do you have for me?” Firstly, stock tips aren’t legal. If you have insider knowledge and give someone that information, you go to jail. What we say to people who ask that question is, “well, we prefer a dividend growth investing strategy.” That strategy is called Quantigence.
Quantigence provides objective tools and methods for guiding dividend-growth investors through the investment process. Developed over the past decade by experienced finance professionals, Quantigence compiles investment knowledge for building a strong portfolio of proven stocks based on strategies we developed using our own capital.
The problem with telling people what investing strategy they should adopt is that you then need to start explaining why you think that strategy is superior. The best thing to say is generally nothing, unless you have the time to explain why you think a dividend-growth investing (DGI) strategy is superior.
There is plenty of research that shows dividends constitute the majority of returns for a given stock over a long horizon. That percentage increases as time goes on. However, instead of relying on research to explain why DGI is desirable, it’s better to articulate the strategy using layman’s terms. Finance people love to obfuscate the simplicity of investing with technical jargon in an attempt to sound superior and justify their exorbitant salaries, despite the fact that many of them do eff-all to earn those salaries. Put simply, a DGI strategy makes sense because it is easy to understand and follow. Most importantly, it outperforms the broader market by a meaningful amount.
In this article, we’ll be introducing you to the mechanics of the DGI portfolio we created using the Quantigence calculator. The method helps investors rank dividend stocks based on Q-scores which in turn help predict the likelihood you’ll continue getting dividend increases every single year. We backtested our current portfolio using various time horizons to show how the incremental increase in dividends makes a huge difference over time. The results assume no dividend reinvestment which could give an additional boost to annual returns.
- If you invested $10,000 25 years ago, your current portfolio would be worth $123,012. This corresponds to a compound annual growth rate (CAGR) of 10.5% versus the most popular S&P 500 SPY ETF’s 7.6% for the same period.
- The same investment 20 years ago would have resulted in a CAGR of 8.3% versus the S&P 500 SPY ETF’s 3.8%.
- The same investment 10 years ago would have resulted in a CAGR of 9.8% versus the S&P 500 SPY ETF’s 10.6%.
As you can see, it’s about time in the market, not timing the market. The longer the time frame, the more impact increasing dividends have on your portfolio value.
Unlike stocks or bonds, Quantigence portfolios provide an income stream that increases every single year, even in the face of a market crisis. The average company in our universe has increased dividends for 41 years in a row. That’s like having your boss give you an above-inflation raise for more years than Kate Hudson has been on this planet.
During the past 41 years, the world has faced five major global crises including the 2007-2009 financial crisis and ensuing global recession, the dotcom bubble of the early 2000s, and Black Monday in 1987. The stocks in our investment universe managed to keep increasing their dividends even with these major disruptions to the global and U.S. economies. As of February 2020, we were still in the longest bull market in history. Instead of worrying about when the markets might crash, adopt recession-proof dividend growth investing strategy that will help you sleep well at night in the coming years.
How Dividend-Growth Investing Works
Companies generate profits that are also referred to as “net income.” They can take those profits and either reinvest them in the company or pay them out as a cash payment to shareholders – what we call “dividends.” One might think that you can only pay dividends if you are profitable, but that’s not true. You might not be profitable, but you can take a loan and still pay dividends. (Chevron, among others, has done this before.) One might think that you can only increase dividends if your profit increases. That’s not true either. If you are only paying out a small portion of your profits in dividends, and your profits decrease, you can still keep increasing your dividends because you have a buffer. That’s what we refer to as a “payout ratio.” A payout ratio refers to the percentage of your profits that you pay out in dividends. Companies with a low payout ratio have a large buffer that allows them to increase dividends even if profits are falling.
When you hire an employee, you look at their CV, a track record of their past performance. You believe that their historical performance is indicative of their future potential. That’s the same approach we take when looking at DGI stocks. If you have a track record of increasing your dividends every year for 25 years, that means it is highly likely that you will continue to do so. As we noted earlier, you can still keep increasing your dividend even if profits are falling. Many dividend investors who dispense advice fail to focus on the importance of track record. Having the free cash flow to constantly pay dividends is a sign of health for any business. Being able to increase them every year while keeping the dividend payout ratio relatively constant demonstrates exceptionally consistent earnings growth.
Therein lies the entire premise of the Quantigence DGI strategy. If a company shows us its CV, which states it has a track record of increasing quarterly payments to us, then we believe it is likely that it will continue to do so. This is why DGI is so appealing to retirees. You can buy a bond that provides you with a fixed payment every quarter, or you can build a diversified DGI portfolio that is highly likely to increase your quarterly payments every year, helping offset inflation. If you have a 30-stock portfolio and one of your DGI stocks goes bankrupt, you only lost 3.33% of your investment. What they call “company-specific risk” is very low.
The problem with investing strategies of any kind is that emotion gets in the way of rational thinking. This is why the Quantigence calculated Q-scores provide an objective way to measure the ability of a stock to provide us with increasing income over time. First, let’s talk about the “universe” of stocks that we will use to construct our portfolio.
In order to build our universe of stocks, we’ll start with the most stalwart dividend-paying stocks in existence – dividend champions. These are companies that have increased their dividends for at least 25 years in a row. There are altogether 133 such stocks in existence that are listed on U.S. stock exchanges.
You’ll notice that the companies in this exclusive list don’t include many of the newfangled so-called big tech stocks. In fact, few technology stocks are dividend champions because they don’t have the history to qualify, and many don’t offer dividends at all. It’s also worth noting that there are other well-known lists out there like the S&P 500 Dividend Aristocrats and Nasdaq Dividend Achievers. However, the dividend champions universe covers all companies listed on exchanges in the United States, providing us with a robust list that we will now proceed to refine.
7 Factors to Consider
In order to rank our universe of DGI stocks, we will look at seven key factors that describe the ability of DGI stocks to keep paying and increasing dividends. We’ll then translate these factors into “Q-scores” which is a proprietary method the Quantigence team uses to compare dividend-growth stocks objectively. It’s also transparent, so here are the seven factors used to create Quantigence Q-Scores.
Years Paying Dividends
We start with our very exclusive club of dividend champions that have increased their dividends for at least 25 years in a row. Companies that have achieved this are highly likely to do everything they can to protect their reputation.
We want to minimize the risk of companies going bankrupt or ceasing to increase their dividends by excluding the smaller half of our universe by market capitalization. Large companies are more stable, and we’re specifically looking for stability to weather periods of market turmoil. The median market cap value of our universe is around $9 billion, so we filter out companies with a market cap of less than $9 billion. This leaves us with 68 potential stocks to invest in that have more diversified and predictable revenue streams for providing us with dividend income increases every year.
A company that only does business in a single country is far riskier than a company with geographically diversified revenue streams. We reward companies with international sales and penalize companies that only do business in ‘Murica.
5-Year Dividend Growth Rate
We reward companies for having dividend growth rates above 5% and penalize those with dividend growth rates below 5%.
10-Year Dividend Growth Rate
We reward companies for having dividend growth rates above 4% and penalize those with dividend growth rates below 4%. Ten years demonstrates more consistency than five years, so there is a bit more of a reward here.
The dividend yield is the ratio of a company’s annual dividend compared to its actual share price. It approximates the return an investor can expect from the dividend payouts over the next year assuming the dividends remain the same. Even with a high dividend growth rate, a low yield can take a long time to grow into something meaningful. We penalize companies with yields under 1.5% and reward companies with higher yields.
Dividend Payout Ratio
The dividend payout ratio reflects the ability for the company to continue raising dividends even if earnings are not growing. This is a buffer of sorts that ensures you will get your yearly raise even if the company is going through a rough patch. We penalize companies with a payout ratio of 90% or higher.
After summing up the seven individual Q-score factors for each company, we can then begin to perform relative comparisons for every one of the DGI stocks in our universe of stocks.
Building Your Own Dividend Growth Stock Portfolio
The next step is to walk you through how to begin building our own portfolio of dividend growth investing stocks. In the full Quantigence Report – freely available to Nanalyze Annual Premium Subscribers – we’ll do the following:
- Show you the entire universe of 68 stocks we ended up with using our screening criteria
- Walk you through the steps we took to create our own 30-stock portfolio
- Perform a relative comparison of all stocks in each of the 11 GICS sectors
- Provide you with the tools you need to create your own custom DGI portfolio
- Provide the detailed calculation methodology for each of these factors
- Discuss when how you should purchase the stocks for your portfolio and maintain it over time.
Here at Nanalyze, the majority of our capital isn’t invested in the tech stocks we cover each week, it’s invested in a portfolio of dividend growth stocks that provide growing income streams. This is the only dividend growth investing strategy we’ve found so far that is based on structured data and an objective set of rules . The Quantigence dividend growth investment calculator objectively shows the likelihood of future dividend increases making portfolio construction an easy step-by-step process. In the report, we’ll walk you through each sector and discuss the available list of stocks while showing you which ones we’ve decided to hold. Here’s a sneak peek at the Materials stocks in our universe ranked by Q-score:
We’ll show you how to become a successful dividend growth investor by walking you through the steps needed to create your own portfolio of dividend paying stocks from the 68 dividend champions our methodology has selected. The Quantigence Report is freely available to download in its entirety for Nanalyze Premium annual subscribers. That’s because the more money you make, the more you’ll be keen to give us in the future when we introduce you to even better investment tools.
Want to join us on our journey of investing in the world’s most stable growth strategy? Sign up for a Nanalyze Premium annual subscription to access The Quantigence Report (and additional disruptive tech investment resources) today.