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Get Your Smart Beta Here! Dividend Growth Stocks As 'Strategic Beta' Investments

Aug. 21, 2015 7:15 AM ETNOBL, IJR211 Comments
David Van Knapp profile picture
David Van Knapp


  • Smart beta is the hottest trend in investing.
  • Dividend growth investing greatly overlaps with smart beta.
  • You can apply smart beta concepts to your stock picking and portfolio management.

Smart beta is hot. A recent MarketWatch article said, "As an investment product, 'smart beta' is a runaway success."

Advertised widely, smart beta has become one of the most hyped methods for generating alpha ever offered by the fund industry. Many of the newest ETFs are designed to exploit smart-beta factors.

According to the Wall Street Journal, there is an estimated $484 billion invested in over 445 smart-beta stock ETFs in the USA. That means that they hold more than 20% of all ETF assets.

It has been reported that smart beta ETFs gathered nearly $40 billion in new assets in the first half of 2015 alone, or half of the new money going into U.S.-listed exchange-traded products this year.

The purpose of this article is to present an overview and discussion of smart beta, and to demonstrate that many smart beta factors are inherently available in dividend growth stocks. In other words, many dividend growth investors already have, or may be constructing, their own smart beta portfolios.

I. What Is Smart Beta?

You may be wondering what smart beta is. Per Investopedia,

Smart beta defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization based indices. Smart beta emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way. The increased popularity of smart beta is linked to a desire for portfolio risk management and diversification along factor dimensions as well as seeking to enhance risk-adjusted returns above cap-weighted indices.

Whoa! What does that mean?

Smart beta indexes select stocks and weight them differently from conventional indexes. That is, there are two dimensions to smart beta: Stock selection and stock weighting. Both dimensions are meant to "load on" performance factors that have been identified as enhancing returns.


This article was written by

David Van Knapp profile picture
“Top 30 Dividend Growth Stocks for 2021: A Sensible Guide to Dividend Growth Investingl is the premier source on how to be a dividend growth investor. Learn more at https://www.davevanknapp.com/home .My mission is to help self-directed individual investors profit from stock investing. I contribute articles and studies to both Seeking Alpha and Daily Trade Alert, as well as videos on YouTube. I hold an undergraduate degree in physics from Holy Cross College and a JD from Georgetown University. My wife and I live in Canandaigua, NY.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (211)

Ckent323 profile picture

I appreciate your comment.

Prior to your comment I reread my comment and realized my commentary is likely not in harmony with a collegial atmosphere. Therefore in the interests of preserving collegiality I self reported my commentary to the moderators (I can no longer edit the comment) as a result it may be deleted.

I do believe that I asked some fair questions. I also believe the replies to me were intended to mock and provoke me. The subtle ad hominem used in two of the replies was evidence of that. These replies coupled with overly aggressive, uncongenial commentary by this person to other commentators in other posts led me to comment on him/her.

I am refraining from additional commentary on my replies above as I do not want to fuel any incivility.

I do want to express my respect of the commentary and collegial discourse practiced by the majority of the people commenting here.

I will endeavor to ignore the provocative commentators in the future.

Collegiality and group (self) moderation is the best path to civil discourse.

I extend my sincere apologies to anyone whose sensibility may have been offended by my comments.


advisor4 profile picture
Ok Clark
I have an MBA from a top 20 business school
I have taught investing and portfolio management in an MBA program
I have worked over 25 years in Finance including some of the worlds largest banks and investment banks.

Take that as a sign of knowledge and experience or lack thereof..or that I am lying..take your pick.
geekette profile picture
what, no audited track record posted?
RockinU profile picture
Bounced around a lot huh? Performance related, or personality?
Paul Wagner profile picture
advisor...you've convinced me, although I'm shocked you don't have more letters after your name. As for me, I have a BA in history from a great college few have heard of, a 25-year career with just one company where I managed a 10-figure portfolio of secured debt and 18.5 years of retirement with my income coming solely from profits on my stock investing.

It's that last part of my CV that you apparently don't find to have any meaning. That's not surprising, because you haven't done it and can't believe someone actually has. So, whatever I say, you denigrate as evidence of nothing.

What you defend is what you have read somewhere. What's that old saying: "those who can, do,............."
David Crosetti profile picture
That survivorship bias thing is a real problem to investing analysis, especially when one is looking at the past.

Thanks for pointing that out.

Again, I don't know why people don't understand this very basic stuff. Thank you for being the voice of sanity and pointing it out to them.

They don't deserve your advice.
PendragonY profile picture

Good thing I wasn't drinking anything when I read your comment above!

advisor4 profile picture
Paul if you think a 5 year track record proves something....

And if you dont think managers drop out of marketocracy.com when they perform poorly....you havent heard of survivorship bias
Paul Wagner profile picture
advisor...perhaps I missed your point or you missed mine. My point is that there are a lot of over-performers at the individual level. For example, I established a "fund" at marketocracy.com in December of 2009. My fund has outperformed the S&P 500 by 200 basis points of annualized return since inception. My point isn't about my outperformance but the fact that my performance is only in the top 54% of the site's universe. That means that there are lot of folks there who outperform me, making me rather average, but still an outperformer.
advisor4 profile picture
Paul you prove my point we are in Lame Wobegon here..everyone is above average..based on your example..way above.
advisor4 profile picture
Berkshire Hathaway Growth Driven By Buyout and Business Mix
Posted by WB on 10 June 2015, 6:57 pm
The Berkshire Hathaway conglomerate consists of nearly 90 subsidiaries and has businesses that range from ice cream to insurance to locomotives.

Although the company runs many different types of businesses, its causality and property insurance business is its main source of income. This overall segment has provided a huge moat for Berkshire Hathaway, making the many acquisitions that the company has enjoyed over the past several years possible.

Some of the economically sensitive noninsurance businesses at Berkshire Hathaway, including manufacturing, retail, service, utilities and energy, are performing quite well and are looking to do so continuously as the economy improves. In particular, Berkshire Hathaway is seeing exponential growth in the energy and utilities sectors led by additional revenue from Burlington Northern Santa Fe railroad, which they acquired back in February 2010.

The finance and financial products segment of Berkshire Hathaway have nicely handled the challenges that came their way due to a soft housing market in the recent past. We expect that trends will improve in this segment since the housing market is rebounding and finally catching up.

With Warren Buffett at the helm of this company, Berkshire Hathaway has created great value for its shareholders over the last few years. With a strong capital position and the unique skills that Warren Buffett possesses, he has made Berkshire Hathaway a huge conglomerate that has an equity stake in many large companies and owns close to 90 subsidiaries.

With so much cash at its disposal, the company is currently contracted for 31 additional bolt on acquisitions that will likely cost in the neighborhood of $7.8 billion. The transactions themselves are in the range of $400,000 to $2.9 billion. During the first quarter of 2015, Berkshire Hathaway purchased controlling interest in Van Tuyl Group. The big acquisitions certainly provide unique business opportunities for Berkshire Hathaway, but the bolt on acquisitions help to improve earnings of the existing businesses.


Filed under berkshire hathaway, warren buffett | Tagged berkshire hathaway, Burlington North
advisor4 profile picture
The authors found that, in addition to benefitting from the use of cheap leverage provided by Berkshire's insurance operations, Warren Buffett bought stocks that are safe, cheap, high-quality and large"
You think this is silly"
But the leverage is a crucial point. Berkshire had free capital (actually negative cost) in the form of insurance premiums to invest, effectively leveraging his portfolios. He acknowledges this in several of his annual reports...in years where they had high insurance payouts (like hurricane Katrina) they had less excess capital to invest in stocks.
As the authors acknowledge in the article (and present data for) a proper replicaton of the Buffet strategy would include leverage.
Plus I have to stress again Buffet made much of his money not buying publicly traded stocks but buying private companies (using legal inside information) the valuation of those holdings is difficult in calculating book value..Buffer's preffered measure. And if you watch what Buffet has been doing lately it has been buying private companies and convertin public stock holdings to private companies he controls (like Duracell with P+G) now that is something no individual could ever do...it would be "silly ' to think so.
Ckent323 profile picture

You seen to be confident of your perspective of how to invest and you project a confidence of knowledge and understanding that allows you to make disparaging comments about how others here go about investing so I have a couple of questions for you:

What experience, training, and knowledge do you bring to this forum that separates you from the average investor you so often refer to?

What experience, training and knowledge do you have that underlies your perspective of what is a better approach to investing than the individual investors also posting here?

I have seen nothing in your profile or in your commentary that would answer those questions.


advisor4 profile picture
feel free to post substantive challenges to anything I write
Ckent323 profile picture

I asked two simple straightforward questions.

Issuing a challenge in reply comes across as an ego statement not an answer.

It seems to me that the lack of a reply to my two questions suggests you may not have substantive experience and knowledge.

Am I parsing your reply correctly?

Most, if not all of the people you criticize have communicated their experience and knowledge (extensive or limited as they might be). I find it curious you are not willing to do that.

Most disappointing.

advisor4 profile picture
Many DG stocks present many characteristics of DG stocks...which really shouldn't be a surprise. All smart beta ETFs remove stocks and rebalance selling stocks that don't fit their criteria (for instance selling stocks that reach high valuations and buying stocks that fall to low valuations, react to dividend cuts etc) and do this "automatically" i,e there are firm rules that are always applied there is no "human intervention".. Same for reinvesting dividends...they dont' hold cash and wait to reinvestf until they judge that they have found a "good opportunity".Unless you do this you are not "finding smart beta" you are using some of the same factors based on your analysis which also includes subjective decisions and managing for cash flow not total return.
Larry Swedroe presented all of this in his articles and was subject to ridicule..you can now find his articles on etf.com
All power to everyone in their stock picking but it is not "smart beta". This has also all been covered in the book What Works in Investing...and in the what works better than DGI article by Chris Demuth on SA as a stock picking strategy. And of course we can all be skeptics on the other hand these factors on autopilot have been shown to work over decades of data across countries. It ain't physics" and it may not work in the future...but there is no comparable data on stock picking nor could there be. Skepticism and faith you will do better is fine..just acknowledge (yes) this is an apples to orages comparison.Etfs with smart beta and fixed rules is not the same as "finding smart beta" with stock picking esp not with dividend income as the key criteria. What you are doing is applying a "stock screen" based on certain criteria something that has been done by stock pickers since the beginning of stock markets.
And yes Buffett did this well (although lots of his gains were not in publicly traded stocks) Michael Jordan was a uniquely talented basketball player. IMO "being like Mike" is as hard as being like WB....but hope springs eternal.
Paul Wagner profile picture
"Michael Jordan was a uniquely talented basketball player. IMO "being like Mike" is as hard as being like WB....but hope springs eternal. "

Poor analogy. We don't have to be the very best like Michael or Warren; a player could sit on the bench of a last place NBA team and would still be in the top 1/1000th of one percent of all basketball players. Just to be on the varsity of any high school team or college team puts you in the top 10% of all basketball players. And to be a starter..even a more elite group.

That's why when I read comments about "typical" investors or "the average retail investor", I know that the commenter has never been a varsity calibre investor and gets some kind of kick out of denigrating the ability of those who are.
advisor4 profile picture
Actually your analogy is ridiculous. You have the choice of making your entire team out of the worlds all stars (investing with Buffett by buying Berkshire Hathaway). Or you can field a team of college varsity players or NBA benchwarmers. But hey your team is better than the "average " person that picks up a basketball.
So you are correct you can be varsity level" or invest with a superstar..best of luck with your decision.
David Crosetti profile picture
Advisor4: "Many DG stocks present many characteristics of DG stocks...which really shouldn't be a surprise."

I know how you feel about that. Many growth stocks present many characteristics of growth stocks........which really shouldn't be a surprise.

And you can say the same thing about EFT's.

Thank you so much for sharing such precise and deep analysis to this conversation thread. You are truly a gem and we miss you when you seem to go away from SA.

Thanks again for the spot on analysis.
advisor4 profile picture
people keep saying this about WB and it is not a full explanation of his investing:
To me it is obvious: The man picked stocks and managed a stock portfolio. "

The man managed a portfolio of stocks and privately held companies with dirt cheap funding (actually negative cost) by investing the insurance premiums.

And if you look at what he has been doing of late it is purchases of private companies and converting his holdings in public companies into private holdings as was the case when he swapped his PG shares for duracell.

and of course there is that advice he gives and that he intends to use for his wife's assets= an sp 500 index fund. As for Graham and indexing you can read this from the man who edited the most recent edition of Graham's Intelligent Investor Jason Zweig and remember Graham throughout his career invested in an area before computers and reams of easily available data on stocks and corporations meaning...an information edge for a stock picker was far easier then. ..same for Buffett's most successful stock picking years. http://on.wsj.com/1yO1Q6r
advisor4 profile picture
David Van Knapp , Contributor
Comments (11986)| + Follow | Send Message
Author’s reply » I thought it was obvious, but perhaps should be clearly stated. Smart beta factors are based on research into total return.

As a dividend growth investor, my central goal relates to building reliable, growing, sufficient income streams. My presentation of smart beta here is designed as a general primer and also to suggest that many excellent DG companies also present one or more smart beta characteristics.
advisor4 profile picture

You are absolutely correct there was no mention of apples or oranges or risk adjusted total return
Just Scott profile picture
To your point-
I saw no mention of apples or oranges in the article, just factors. If you choose to disregard dividends and the ability to pay them as irrelevant and that works for you I'm OK with that. DVK was pointing out he thinks it's a factor. I agree.
In his own words-
" In my opinion, dividend growth investing is already smart beta investing. That is because all dividend growth stocks display the dividend growth factor, and many are high quality and low volatility as well. In stock selection and portfolio management, any dividend growth investor may apply smart beta concepts like equal weighting, rebalancing, and the like, to further "load on" the factors."
Bob Wells profile picture

An important piece of work. Many thanks. I recently finished a great read "Behavioral Portfolio Management" by C. Thomas Howard Phd. While the book is geared to advisers there is much for the SDI to absorb. He starts with a rejection of MPT and focuses over all on the subject of controlling emotions. He advocates strategy,consistency and conviction. He advocates high conviction stocks or best idea holdings. He advocates the development of a portfolio business plan. He advocates one chief equity strategy, one secondary strategy coupled with 5 strategy elements selected from 40 now available. His primary strategy is Valuation. Profitability is secondary with the following elements: Dividend Yield, Strong financials, Price ratios, Behavioral Factors and Contrarian. He takes a set it and forget long term approach.

Take care
Just Scott profile picture
I for one object to being called "a follower", like minded thinker may be. I presume you and PIA got your ideas from somewhere and didn't just crawl out from under a rock with all your smarts.
Please be aware that dividend investing precedes SA, discount brokers, mutual funds, ETF's, and all of us on these boards. The terms and labels that have been coined may be new but not the idea. I learned it from a mentor who used to visit his brokers office regularly as there was no other source for info other than the stockpages of the newspaper. Unfortunately cancer took him way too early. At the time of her death at 95 his wife still held vast amounts of the likes of SO and XOM (all with a basis way less than acquired cost) and was able to stay in her own home with 24 hour care, all paid for with DIVIDENDS. Don't tell me it doesn't work.

To all others, thanks for your efforts here and please excuse my snarkiness. A ROSE I am not. And since SA has not provided an ignore button could somebody please start a "voted off the island" page?

Oh and forget my "following" comment above. I am actually following quite a few around here.
advisor4 profile picture
Strategic beta is (claims to be) higher risk adjusted total returns Your portfolios are designed to throw off dividend income...In fact you and your followers state ad infinitum total retunf and even volaitlity (risk) is irrelevant you just cash the dividend checks and dont look at the account value on your statement (total return).

All power to you and your followers but you are comparing apples and oranges.
advisor4 profile picture
Excellent article but you are comparing apples and oranges. You and most of your readers are managing for dividend yield, the smart beta strategies seek higher total return. You exclude many(most) stocks that dont fit your criteria related to dividends. So a fair comparison (one that is apparently irrelevant to most people here )is total return. For someone accumulating their nest egg the most important thing is to grow the nest egg which is total return which you note in the article.

Unless you can show your stock picking produces higher total return you haven't beaten the total return of smart beta ( you can check total return volatility and cagr for the etfs at etf.com). Let's just say the odds of doing this are small. But every one here believes they live in Lake Wobegon where eveyone is above average. They may be right but they cant produce data to "prove it" going back not only many decades .
In other words you dont "get your smart beta here"or at least prove it in your article you get better cashflow..explicitly not the goal of these smart beta etfs. And that well be the goal of most readers here..higher cashflow. That as you acknowledge is not the criteria for accumulators ...they need total return. And since accumulators form the majority of investors (otherwise social security would already be broke) although apparently not most of your readers and certainly not you...the results are irrelevant to most investors...unless you can prove your stock picking strategy would have worked for many decades measured by total return..which of course you would acknowledge you cant.

You did some great research...but missed a point even some of the dividend etfs dont manage for yield they manage for total return in other words they are based on research(theory ) a dividend screen produces higher returns. In face if they are smart beta they produce both higher returns and lower volatility than the market,. Personally I am agnostic on that.

So congrats you did some great research on one part of the smart beta universe but you didnt prove "you can get your smart beta here" since you havent shown your methodology produces higher return and lower volatility than the market..Yes i know I know..irrelevant to you and most of your readers. But if you are going to put what you believe is a rigorous academic article your summary is excellent but you haven't proven what is in the title.

I know the comments will show dividend and not toal retuen is what is relevant to them I wish you all a great retirement.

Two other points:
If you invest in a taxable account all of your dividend numbers need to be cut by the tax rate on dividends. A lower yield produces lower taxes...again irrelevant to anyone taking the money out of a tax deferred acount in retirment...quite relevant to accumulators.

One more note we are living in the lowest interest rate environment in history since around 2008 when even yields on the bonds of companies yield more than the stocks. That is a historical anomaly I'll leave it to others to predict the future. But you can look over at Fred from the ST Louis fed for historical data except for the post war period and ther period immediately after WWI Investment Grade corporate bonds have yielded 5% or higher. ..locked in. And others can decide if that is relevant to them.

Congrats again on the fruits of much labor but you didnt prove what is in your title.
David Crosetti profile picture

You are so spot on about taxes. I actually quit my job in October because the taxes I was paying on my job were so oppressive as to make the job almost like working for free.

Taxes. Man, they are terrible and cold water thrown on a good party.

Thanks for the insight. You are the best.
CapVandal profile picture
"But you can look over at Fred from the ST Louis fed for historical data except for the post war period and ther period immediately after WWI Investment Grade corporate bonds have yielded 5% or higher. ..locked in."

Most people would take 5% 'locked in' right now. Financial assets are priced on nominal interest rate assumptions. And those are driven by inflation assumptions.

Looking at lengthy periods is a good way to see how easily it is to become anchored to 'normal' values for various time periods. Anchoring (the cognitive bias) isn't necessarily a problem. That is ... the anchor may be the exact right number, or right enough. Everyone expects some sort of mean reversion, but reversion to what?

Whatever. These outcomes of these macro factors ... as you noted ... will drive results. And, even people that are pure bottom up, fundamental value investors .. and never explicitly think about these things, still say things like 'stocks are expensive' or 'I can't find anything I want to buy at a good price'. Which amounts to the same thing.
David Crosetti profile picture
I am wondering if anyone picked up on the irony?
The information on PID - that was a joke, right??? 15 - 20 dollar ETF with a volume of ~ 980,000 and fee rating .38.
Where's the beef? lol
rhiannion: I have no idea what you are trying to say. In any case, I looked over your comments and the stocks that you appear to have purchased in recent years: BHP, LINE, VALE, NLY, CHK, etc.

Wow! It's like a Who's Who of yield-chase train wrecks. Have you considered not playing the "Loser's Game"? You can use passive funds to outperform 80-99% of investors in the long run. Whether value funds, smart beta, DGI...whatever. You'll come out ahead.
If you have/had read my comments, you would have noticed that I no longer have NLY, VALE, and CHK, that I exited them with slight profit before/during the dividend cuts and didn't recommend the stocks. These were purchased during my Cramer beginning investment phase :- ) Also, I don't own BHP in the strict sense of the stock ticker but do continue to own BBL since 2012 when I started investing; it's a good company,
As to the comment I made, it concerns your recommendation of PID ETF, and your link to it's information, and the information provided on that link. I thought you were making a derogatory example of ETFs - a joke, as it were.
I hope this explains my comments. Question: Do you have a reading comprehension disability? I have a friend that worked through one.

That's nice! that you were concerned about my stock choices. Why Bless Your Heart! I've learned since then to be selective about who's advice on this site to follow and research.

You all take care now, heah?
David Crosetti profile picture

It doesn't matter.

The fact that you once "owned" them means that you are a terrible investor.

Hell, I once owned BAC.

Bought if under $7 a share, though.

Sold half of my shares at $18.40 not to long ago................

But, I'm a terrible investor because I bought some stock that declined in price.

The shame of it all.
In a comment above, the author Van Knapp enthusiastically stated that Wisdom Tree holds lots of dividend and dividend growth ETFs.

After checking out a couple of the ETFs, I learned that their "dividend growth" ETFs have nothing to do with the way that DGI enthusiasts here use the term. The "dividend growth" ETFs from Wisdom Tree select stocks based on sophisticated stock quality research from academia, not from old-fashioned, unsophisticated lists of stocks with a long streak of rising dividends.

Wisdom Tree seems to be trying to cash in on the recent popularity among retail investors who enthusiastically embrace the phrases "dividend" and "dividend growth". In fact, prior to 2011, the WisdomTree Global ex-U.S. Dividend Growth Fund was named the WisdomTree World ex-US Growth Fund.

If you are an inexperienced investor who is getting swept up in Dividend Growth fever that abounds on Seeking Alpha, I suggest you look at the long term performance of the PowerShares International Dividend Achievers ETF (ticker: PID). The dividend growth salesmen and evangelists will likely argue that American DGI companies are superior and not comparable to world class companies outside the US. Believe them at your risk, especially when the US equity market is 6+ years into one of the longest, strongest bull markets in history. Here's a chart of PID since inception about a decade ago:

David Van Knapp profile picture
"In a comment above, the author Van Knapp enthusiastically stated that Wisdom Tree holds lots of dividend and dividend growth ETFs."

No, I corrected your erroneous implication that Wisdom Tree did not market dividend funds. It took about a minute to find out that you were wrong. I have no opinion about the funds. They exist.
Van Knapp:

My original comment said nothing about dividend funds. I specifically used the acronym DGI. The DG stands for dividend growth. Dividend funds are not dividend growth funds. Dividend funds are not "smart beta".

The article did a pretty good job of summarizing factor research, which I suspect set off the snooze alarm by the stock hobbyists here who seem to prefer getting stock tips. But the truly interesting part of the article was the exhibition of the psychology of confirmation bias. (The straw man argument you made about "dividend stocks" was part of the confirmation bias.)
DVK, what a super article! Wow. It's a keeper for sure. Looking forward to the next installment. Thank you.
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