What are we looking for?
A blended portfolio of U.S.-listed momentum and income stocks.
The screen
“Sleeves,” in investing, refer to groups of securities that have similar characteristics. These characteristics can be high-level – for example, splitting securities based on their geographic location or distinguishing between different asset classes – or they can be used at a more granular level – for example, splitting your international equities into groups based on how they are selected.
Several weeks ago, I created a Canadian strategy that focused on the latter type of sleeves, looking separately for income and momentum stocks and then combining them together into a single Canadian equity portfolio. Today, I’m going to repeat this exercise for U.S.-listed stocks.
My strategy today consists of two different sleeves: dividend growth and momentum. The dividend growth sleeve will search for U.S. income stocks, and the momentum sleeve will search for U.S. stocks with positive upward momentum. The resulting portfolio will combine the two sleeves together in a 50/50 mix. The stocks are selected from the CPMS U.S. universe, which currently holds 2,170 names.
The Dividend Growth sleeve ranks stocks based on:
- Five-year dividend growth rate – an annualized number representing how much a company has increased its dividends across the past five years, higher values preferred;
- Expected dividend yield – expected dividends in the next 12 months divided by most recent stock price, higher valued preferred;
- Five-year beta relative to the S&P 500 – a measure of the sensitivity of a stock relative to the benchmark, lower values preferred;
- Five-year earnings-per-share growth – an annualized number representing how much a company has increased its EPS across the past five years, higher values preferred.
The Momentum sleeve ranks stocks based on:
- Three-month earnings-per-share estimate revision – the percentage change of a company’s median EPS estimate over the past three months, higher values preferred;
- Price-relative to three-month average – the percentage change of a stock’s most recent price compared with its three-month daily average price, higher values preferred;
- Price-change from 12-month high – a momentum factor based on stock price, least-negative values are preferred.
More about Morningstar
Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 120 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we found
I used Morningstar CPMS to back-test this strategy from December, 1993, to February, 2019. During this process, a maximum of 15 stocks per sleeve were purchased, for a strategy maximum of 30 stocks. Stocks were sold from the Dividend Growth sleeve when their dividend yield fell below 1 per cent; they were sold from the Momentum sleeve when their three-month EPS revision fell below minus 10 per cent. When sold, the positions were replaced with the highest-ranked stock not already owned in that particular sleeve of the portfolio.
Over this period, the strategy (with a 50-per-cent allocation to each model) produced an annualized total return of 14.5 per cent while the S&P 500 Total Return Index returned 9.5 per cent across the same period. Separately, the Dividend Growth sleeve returned 11 per cent, while the Momentum sleeve returned 16.3 per cent. The top 10 stocks that qualify today for purchase in each sleeve of the strategy are shown in the accompanying tables.
As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Emily Halverson-Duncan, CFA, is a director, CPMS sales at Morningstar Research Inc.
Emily Halverson-Duncan, CFA