The Dividend Cushion ratio is one of the most powerful financial tools an income or dividend growth investor can use in conjunction with qualitative dividend analysis. The ratio is one-of-a-kind in that it is both free-cash-flow based and forward looking. Since its creation in 2012, the Dividend Cushion ratio has forewarned readers of approximately 50 dividend cuts. We estimate its efficacy at ~90%.
Note: This article corrects the degree of outperformance of the simulated Dividend Growth Newsletter portfolio, as of the date of the calculation (~3.6% –> ~9.4%).
By Brian Nelson, CFA
Excluding dividends, we estimate that the simulated Dividend Growth Newsletter portfolio is down roughly 4.9% through the interim session October 30 from the beginning of 2022, beating the S&P Dividend ETF SPDR (SDY) by roughly 9.4 percentage points and the broader S&P 500 (SPY) by a considerable amount over this time frame. Dividend growth stocks, or more appropriately stated, the “right” dividend growth stocks have held up nicely in the current market environment. We continue to be huge fans of a dividend growth strategy that has a DCF-based valuation overlay, and one that takes into consideration the cash-based sources of intrinsic value: net cash on the balance sheet and future expected free cash flow.
Two of the strongest contributors to the simulated Dividend Growth Newsletter portfolio the past couple years have been positions we closed back in March 2023, Exxon Mobil (XOM) and Chevron (CVX). Though we still like the free cash flow these names are throwing off, we’ve moved beyond the energy space following its huge run-up the past 12-18 months, and we continue to emphasize that our favorite areas, almost across the board, remain big cap tech and the stylistic area of large cap growth, with Oracle (ORCL) a standout contributor to the simulated portfolio’s outperformance since the beginning of 2022. Defense contractor Lockheed Martin (LMT) has also performed nicely, and we continue to like the company’s defense exposure in a world where geopolitical tensions continue to escalate.
Inclusive of dividends, we estimate that the simulated Dividend Growth Newsletter portfolio has been roughly “flattish” since the beginning of 2022, not a bad showing when most equity REITs (VNQ), mortgage REITs (REM) and utilities (XLU) have faced aggressive sell-offs. Over the past year, equity REITs are down more than 12%, mortgage REITs are down nearly 19%, while utilities are down more than 12%. We like the simulated Dividend Growth Newsletter’s high-yield exposure to the JPMorgan Equity Premium Income ETF (JEPI) and Global X SuperDividend U.S. ETF (DIV) as it provides a nice yield boost relative to the S&P Dividend ETF SPDR, which may be considered an appropriate benchmark of the portfolio.
Large cap growth names in the likes of Apple (AAPL), Microsoft (MSFT), Oracle, and Cisco (CSCO) form a solid foundation for continued dividend growth across the portfolio thanks in part to their fantastic Dividend Cushion ratios. Not only this, but we like the defensive characteristics of garbage hauler Republic Services (RSG) and McDonald’s (MCD), and the tried-and-true dynamics of Home Depot (HD), Honeywell (HON) and UnitedHealth (UNH), which can handle just about any economic environment that is thrown at them. Today, the 10-year Treasury rate stands at close to 5%, so while many dividend growth stocks don’t yield as much as near-term Treasuries, we still like their cash-based sources of intrinsic value, as such dynamics offer substantial support to their equity prices, despite competing sources of income.
All told, the past couple years or so have been quite volatile following the COVID-19 boom that occurred in 2021, but we like how the newsletter portfolios have held up. We recently showed that the simulated Best Ideas Newsletter portfolio outperformed the cap-weighted S&P 500 since the beginning of 2022, but not to be outdone, the Dividend Growth Newsletter portfolio also beat its benchmark [SDY] and the cap-weighted S&P 500 over the same time horizon. It’s easy to be complacent during massive bull-market runs, as that investors experienced through much of last decade, but the true test of portfolio construction came during the past couple years, and we think both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio passed with flying colors.
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, QQQ, and SCHG. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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