While reading articles on SeekingAlpha, I found out an article about a dividend growth strategy written by Fred Piard (https://seekingalpha.com/article/4124541-kiss-dividend-strategy-worth-15-percent-year-part-2). His original work is based on stocks coming from the Russell 1000 index. I decided to try to apply the same idea on the Swiss stocks.
The rules are quite simple:
- Sort the original list by dividend yield. Pick the top 200 stocks.
- Rank these candidates by ROA (return on assets). Higher ROA is considered better.
- Pick the top 20 remaining stocks. To preserve diversification, skip a stock if you have already 5 stocks in the same sector.
- Repeat every N months and buy/sell to match the latest list. (can be every month, twice per year, …)
The rebalancing frequency depends upon several factors: transaction costs, active/passive style of portfolio management, taxes, etc. For the reasons behind the ROA usage, please check the original article by F. Piard.
Swiss stocks selection for Nov. 2017
I applied this process on the listed Swiss equities, I did not start from an existing ETF, as most of them are restricted to SMI or SMIM stocks, I wanted to use a large universe. I had to extract information from various .csv available on SIX pages as well as retrieving the ROA/div. yield by parsing html pages. There is no easy (free) API or Excel file with all required data that you could download at once.
Here is the result for Nov. 2017. One stock is in red because the dividend yield is extremely high and that could be a risky investment. Many DGI investors like to keep stocks with dividends in the usual 1-4% range, these stocks are less prone to dividends being slashed.
Here is the result for the Russell 1000 screening:
Developers may be interested in this (C# code) - only Russell for the moment, Swiss stocks will follow: https://github.com/albc4l/russell
Testing the strategy with a Strateo demo account, 10k CHF. I decided to allocate 1k CHF per stock with market orders executed this morning. Some of the stocks in the list are not really liquid for a small portfolio with one share costing several thousands. This leaves about 1.6k in cash. Dont know yet when I will rebalance.
Let us know how it works for you, very nice experiment! Are you a DGI investor by the way?
Thanks, I will try to give some thoughts about how things evolve. I have one real account that is more focused on regular income with a mix of bonds/stocks ETF, and another one which is more about growth/trading. Both are rather small accounts though. I reinvest the dividends/coupons on the first account whenever I reach a 1k cash position, but I could change this in the future if I move to a less expensive broker like DeGiro.
Don’t really know why would you want to optimize for dividends, personally I’m targeting P/FCF when looking for opportunities. You’re not in Kansas anymore and need to take into account swiss investment specifics: dividends are taxed to death and capital gains are tax free. Unlike US where a DGI strategy might be ok tax-wise as both are roughly similarly taxed at 15-20%. But even then I’m personally more in favor of internal compounding than compounding through dividend reinvestment, especially as you’re already targetting firms with above average returns on capital. With dividend reinvestment you lose twice: you cough up most of your dividend to the state and you would typically pay far above book value for your investment in the company. If the company can rather reinvest the profits in itself and maintain similar rate of returns, it’s an order of magnitude more efficient investment, that’s a simple arithmetic.
Does VT or VTI make sense from this perspective? Maybe they are some low cost funds that minimize dividends?
Yes for example on iShares you can filter their ETFs on the revenue usage criteria, either “accumulating” or “distribution” (dividend). SWDA (iShares Core MSCI World UCITS ETF, no distribution) has a TER of 0.2%
@hedgehog: you are right and I often forget that our tax system is not optimal for a DGI strategy. On the other side, the companies with steady dividends may lack some growth but are relatively stable and still growing over time, they are fairly safe for a long investment perspective. I think a portfolio must have an aggressive edge with about a third or even more dedicated to growth stocks, that’s not the purpose of the ROA strategy though.
This is the current status of the portfolio. I will reevaluate composition in a few months (at least after the earnings). Goal is to collect some divs.
An update of the Russell 1000 screening. On the left the screening in Nov 2017, on right today’s screening.
Green dot: higher rank, Red: low rank, Blue: new ticker.
I launched it on Swiss stocks as well but did not get new results, I suspect the info I get from SIX are updated on a yearly basis instead of quarterly for US stocks. The portfolio was hit during the recent correction but held well , it’s still +4% up.