Sizemore Capital Allocation Change: Dividend Appreciation

Sizemore Capital is making a strategic allocation shift for all ETF portfolios with U.S. large cap exposure.  This affects the Tactical ETF Portfolio and the Strategic Growth Allocation.

To be consistent with Sizemore Capital’s focus on dividend growth, we are eliminating our long-term positions in the iShares S&P 500 Index (NYSE:$IVV) and replacing them with the Vanguard Dividend Appreciation ETF (NYSE:$VIG). 

The Vanguard Dividend Appreciation ETF tracks the performance of the Dividend Achievers Select Index, which consists of U.S. stocks that have long history of raising their dividends.  Every stock in the portfolio must have raised its dividend for a minimum of 10 consecutive years.

Much of our research and investment in recent years has focused on income and income growth, and for good reason.  Capital gains can be ephemeral, and the only way that investors can realize their returns is by selling shares.  Rather than enjoying the milk in the form of dividends, you end up slaughtering the cow. And continuing this analogy, once the cow is gone investors are left with nothing to eat.

I should note that both the Tactical ETF Portfolio and Strategic Growth Allocation are long-term growth models with current income as only a secondary objective. But even for growth-oriented investors with years or decades until retirement, a dividend-growth strategy makes sense, and the Vanguard Dividend Appreciation ETF is very consistent with a growth strategy.

Remember, the Vanguard Dividend Appreciation ETF does not have current income as its primary objective.   With a current dividend yield of 2.0%, it doesn’t pay significantly more than the S&P 500’s 1.9%.

Its focus on dividends is instead a focus on quality.  When a company raises its dividend, it sends a powerful message that management sees better days ahead. The discipline required to consistently pay a dividend also has a way of discouraging management from wasting shareholder money on quixotic empire building or on overpriced mergers that fail to deliver value.  It forces management to be efficient.  And importantly, it also helps to keep management honest.  Paper earnings can be manipulated, but dividends have to be paid in cold, hard cash.  Dividends don’t lie.

My good friend Albert Meyer of Bastiat Capital refers to his own strategy as “an index fund, but without all the rubbish.”  (It sounds classic in his professorial South African accent.)

This is how I like to think of the Vanguard Dividend Appreciation ETF.  With a portfolio turnover of only 14% per year and a management fee of only 0.13%, VIG enjoys the best aspects of an index fund—tax and fee efficiency—but without the baggage of the lower-quality companies that bog down most indices.

The Strategic Growth Allocation currently already has a position in the iShares Dow Jones Select Dividend ETF (NYSE:$DVY). It is fair to ask whether an additional position in the Vanguard Dividend Appreciation ETF is redundant.  But to this question, I would give an emphatic “no.”

DVY is primarily an income-focused ETF with a heavy allocation the utilities sector.  VIG is a growth-focused ETF with greater exposure to the consumer and industrial sectors.  Though they both have “dividend” in their titles, their strategies are vastly different (see “Dividend ETFs for Growth and Income”).

Disclosures: IVV, VIG and DVY are positions in Sizemore Capital accounts.

2 Responses