SciVest Capital Management Inc. ("SciVest") implements within most of its Managed Accounts one of several variants of an overall investment strategy called the SciVest Growth of Dividend Income Strategy (the "SGDI Strategy"). The SGDI Strategy invests primarily in larger capitalization, global, dividend paying, equity securities (including securities of unit trusts, real estate investment trusts and depository receipts) which are expected to grow their dividend payments to investors in the future.
Fundamental Investment Objective
The fundamental investment objective of the SGDI Strategy is to provide income and moderate long-term capital appreciation by investing primarily in dividend paying equity securities of companies around the world.
The SGDI Strategy invests primarily in larger capitalization, global, dividend paying, equity securities (including securities of unit trusts, real estate investment trusts and depository receipts), with the intent of providing:
a consistent and above market average dividend income yield to the portfolio;
growth in the absolute level of dividend income generated by the portfolio through time; and
moderate long-term capital appreciation of the portfolio.
These investment objectives are stated in order of priority. Importantly, SciVest believes that by focusing on dividend paying companies which are expected to grow their dividends through time will ultimately result in long-term capital appreciation of the investment portfolio. That is, long-term capital appreciation of the portfolio is a consequence of focusing on attractive growth of dividend payment investments.
Firstly, to ensure an above average dividend income yield, the SGDI Strategy holds a diversified investment portfolio of relatively high yielding, high quality, large capitalization, Global, dividend paying common equities (and equivalents) which across the entire portfolio are expected to produce an average gross current dividend yield of 3.0% to 4.5% per annum. Secondly, the SGDI Strategy focuses on and invests in those high quality, Global, dividend paying equities that SciVest expects to materially grow their dividends in the future, generally representing dividend growth in excess of 5% per annum at the portfolio level over an economic cycle. Thirdly, SciVest believes that a focus on growing dividend income will in the long-term produce higher investment capital because as dividends grow ultimately price should increase in order to maintain an approximately consistent current income yield (Current Yield = Dividend/Price), thereby generating long-term capital appreciation. SciVest also believes that this capital appreciation can be further enhanced by tilting the portfolio towards dividend growth stocks of cheaper, higher quality, faster growing companies and by monitoring such holdings for adverse changes in fundamentals.
When making equity purchase decisions for the SGDI Strategy, SciVest generally considers:
dividend payment history;
dividend payment future expectations regarding dividend sustainability and growth;
applicable dividend withholding taxes;
earnings, cash-flows, dividends and dividend pay-out ratios, both historical and forward looking, as they relate to a company’s ability to continue to pay and grow its dividends;
stock valuation metrics relative to historical norms, industry peers and company growth, with a strong preference for cheap relative to expensive;
stock valuation metric and stock price trends, in relation to dividend payments, to aid in determining best position entry points for the long-term;
the issuer’s long-term business model and overall “story”;
a position’s relative attractiveness compared to the portfolio’s other existing holdings and potential holdings; and
the overall portfolio-level diversification and risk implications of adding any specific company and its stock to the portfolio.
Securities held within a SGDI Strategy investment portfolio are generally trimmed or liquidated if and when:
dividend sustainability and/or growth is deemed to be in doubt;
a dividend decrease is announced or actually occurs;
stock price is deemed to have risen too much relative to dividend payout, stock valuation metrics and/or company prospects;
a position weight exceeds 5.0% of the net asset value of the portfolio or the position weight becomes larger than desired given the risk of the position; and/or
there exists a significantly better investment opportunity for the portfolio.
Since the primary investment objective of the SGDI Strategy is to provide a consistent and growing dividend income stream to its investors, SGDI Strategy portfolios are almost always near fully invested (after the initial account opening investment period) to maintain their dividend income stream – regardless of equity market conditions. However, the SGDI Strategy may hold up to 25% in net cash depending upon the availability of investment opportunities or in extreme adverse market environments.
General Investment Parameters
While the SGDI Strategy investment mandate is designed to be sufficiently flexible to take advantage of opportunities as they arise, the SGDI Strategy generally operates with the following principles and guidelines (subject to specific client restrictions):
The portfolio invests in publically-listed, liquid, dividend paying, common equity shares (including equivalent unit trusts, real estate investment trusts and depository receipts);
Forward looking dividend sustainability and growth is the primary investment focus and investment decision driver;
The portfolio does not pursue any "fixed" income securities such as preferred shares or bonds where "growth" of income cannot be obtained;
The portfolio has a Global focus investing in companies doing business in Canada, the US and around the World;
Currently most portfolios are invested in Canadian and US-listed companies, including foreign companies listed as depository receipts in the US;
The portfolio focuses on large capitalization companies, generally larger than $2 billion in equity market capitalization;
Portfolio diversification is a prominent risk management and mitigation tool;
The portfolio is generally broadly diversified generally holding 30 to 80 individual stock holdings, with no individual company generally representing more than 5.0% of the value of the overall portfolio on a cost basis (depending upon account size, with smaller accounts holding fewer positions with higher relative position sizes);
If a Canadian resident taxable account, the portfolio generally holds a disproportionally large Canadian content (often 10% to 20%) to take advantage of the preferential tax treatment of Canadian dividends for Canadian resident investors;
The portfolio is diversified across economic sectors, generally investing no more than 25% of the portfolio in any single sector, and generally holding some weight in the vast majority of sectors;
Industry diversification within economic sectors is also an important consideration; and
While the portfolio will almost always be fully invested to maintain its dividend income stream, it may hold up to 25% in net cash depending upon market environment and investment opportunities.
The SGDI Strategy is a long-term investment strategy.
As an equity-based strategy, the capital value of SGDI Strategy investment portfolios are subject to the short and medium term risk and volatility of the equity markets. As a result, large near-term capital requirements should not be funded from SGDI Strategy investment portfolios. On the other hand, the dividend income produced by SGDI Strategy investment portfolios is expected to be relatively consistent and reliable, regardless of short-term equity market volatility.
Importantly, the SDGI Strategy is designed to produce ever increasing annual dividend income. That is, it is designed to produce an income stream that in the long-term grows faster than inflation thereby producing an income stream that more than maintains its purchasing power indefinitely into the future (unlike fixed income whose income purchasing power falls every year). In addition, a growing income stream is also expected to produce moderate capital growth that in the long-term which is also expected to grow faster than inflation thereby more than maintaining its purchasing power indefinitely into the future (again unlike fixed income whose capital purchasing power falls every year). In sum, the SGDI Strategy is designed to be a "forever" income strategy – i.e., an investment strategy where, on average, its income and capital grow in real purchasing power terms indefinitely into the future.
SciVest is not aware of a widely publicized benchmark index which is appropriate to benchmark the SDGI Strategy. While in the short to medium term SDGI Strategy portfolio returns will move broadly with large capitalization global equity market indexes, the significant differences in the characteristics of the holdings (and importantly the objectives) of the SDGI Strategy portfolios relative to any of the widely publicized benchmarks indexes do not allow for direct comparisons of short to medium term returns.
In the long-term (i.e., over a full economic cycle), the performance of the SDGI Strategy should be judged against its objectives. Specifically, the SDGI Strategy’s ability to provide a consistent and above market average income stream which grows at a rate higher than the inflation rate (thereby more than maintaining the income’s purchasing power); and the SDGI Strategy’s ability to provide moderate long-term capital growth which grows at a rate higher than the inflation rate (thereby more than maintaining the capital’s purchasing power).
As a large capitalization, global equity strategy, the capital value of SGDI Strategy investment portfolios are subject to the risks and volatility of the global equity markets. That is, the value of the SGDI Strategy portfolios will change from day to day, reflecting changes in interest rates, economic conditions, and market and company news. As a result, the value of SGDI Strategy investment portfolios may go up and down, and the value of investments within a client accounts may at any given point in time be more or less than initially invested within it. Please refer to SciVest's Relationship Disclosure Document for a detailed listing of specific risk factors that may be relevant to the SGDI Strategy investment portfolios.
In addition, the SGDI Strategy is a single investment strategy which invests primarily within the equity asset class. As such, the SGDI Strategy is not intended to be a complete investment program, and should be held as part of a larger more diversified investment portfolio consisting of other investment strategies and asset classes.
Neverhtless, SGDI Strategy portfolios are expected to have lower than average equity market risk and volatility due to: the relatively lower risk nature of larger capitalization dividend paying stocks; downside price support due to relatively higher dividend yield of its stock holdings; extensive diversification by individual stock, industry, sector and country; and the equity options writing program.
Overall Long-Term Objectives
Overall in the long-term, the SGDI Strategy portfolios strive for the following overall characteristics: 1) An attractive and stable current income yield; 2) An attractive absolute income growth rate which is meaningfully higher than the inflation rate; 3) Moderate long-term capital appreciation which is also higher than the inflation rate; and 4) Lower than average equity market capital risk and volatility.
Optional SGDI Strategy Overlay Programs
SciVest offers three optional SGDI Strategy portfolio overlays to qualified investors:
- Options Writing Income Overlay Program
- Currency Hedging Program
- Options-Based Market Hedging Program