According to Prima, the firm’s dividend growth strategy’s philosophy is to seek total return from both dividend income and capital growth with lower-than-market volatility. Santa Barbara does this by investing in dividend-paying companies using three elements when constructing the portfolio: aggregate dividend yield that is higher than the S&P 500; volatility that is lower than the S&P 500; and identifying companies that grow their dividends.
Prima notes the dividend growth investment process begins by identifying a universe of approximately 5,000 companies. This universe is reduced to approximately 1,000 companies that are currently paying dividends on their equity securities. The investment universe includes both domestic and non-U.S. companies and is generally restricted to companies with a current market capitalization above $3 billion.
Santa Barbara then removes companies that do not pay tax-advantaged dividends, including REITs and limited partnerships, resulting in approximately 800 companies. The firm then applies quantitative screens to identify high-dividend-paying companies by sector and industry, resulting in approximately 250 companies. Additional screens are then applied to identify companies with high dividend growth rates.
From the remaining pool of approximately 100 companies, Santa Barbara applies bottom-up fundamental analysis to evaluate the prospects for sustainable dividend growth and capital appreciation. When selecting companies for the portfolio, the firm evaluates certain factors, including a sound business model, strong overall financial position, earnings growth, return on equity, quality of management, potential for dividend growth, market valuation and the commitment to return cash to shareholders. Using this information, Santa Barbara constructs a diversified portfolio, which generally consists of 30 to 50 holdings with broad sector and industrial representation.
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On April 11, Prima Capital’s research team will be hosting a 30-minute free Web seminar for advisors covering the key elements of performance attribution and manager portfolio positioning in the equity, fixed income and alternative areas of the market for the first quarter.
We invite you to register for the 4:00 PM ET April 11 event here.
Read about the Prima Capital/Investment Advisor 2011 SMA Managers of the Year.