By Philip van Doorn, MarketWatch
Blockforce Capital, formerly Reality Shares, has a passive strategy to select large-cap dividend-paying stocks based on the likelihood that the companies will raise dividend payments.
The company has used this approach for the Reality Shares DIVCON Leaders ETF /zigman2/quotes/202627489/composite LEAD +0.88% since early 2016, and the results have been good so far. The icing on the cake may be that the ETF’s conservative strategy is designed to outperform during down markets.
When we first covered Reality Shares’ DIVCON strategy in October 2015, the company was only running one ETF, the Reality Shares DIVS ETF /zigman2/quotes/208779950/composite DIVY +0.17% , which is essentially a play on how much S&P 500 /zigman2/quotes/210599714/realtime SPX +0.72% member companies increase their dividends.
But DIVY is really a conservative investment, which Blockforce senior analyst Kian Salehizadeh describes as “more of a fixed-income ETF replacement or compliment,” which is expected to have low volatility and a “consistent 3% to 5% return per year.” For three years through Oct. 9, DIVY had an average annual return of 5.5%, with a four-star rating (the second highest) in Morningstar’s “multialternative” category.
Reality Shares was founded in 2012 and is headquartered in San Diego, with about $260 million in assets under management. The company was renamed Blockforce Capital in August, to reflect the fact that a considerable portion of its assets under management are now in the Reality Shares Nasdaq NexGen Economy ETF /zigman2/quotes/208017739/composite BLCN +3.28% , which invests in companies that use blockchain technology, and the Nasdaq NexGen Economy China ETF , which seeks to do the same but with a focus on companies operating in China.
DIVCON for growth and two other strategies
In January 2016, Reality Shares established three ETFs that select stocks based on the firm’s DIVCON scores. A company’s DIVCON score predicts how likely it is to increase its dividend over the next 12 months. A score of 5 is best, 1 is worst. The score incorporates financial-statement analysis, a company’s history of raising or cutting dividend payouts, as well as stock-buyback activity. The idea is to highlight quality based on improving earnings and cash flow, as well as a history of rewarding investors with significant increases in dividend payouts, irrespective of current dividend yields.
The Reality Shares DIVCON Leaders Dividend ETF /zigman2/quotes/202627489/composite LEAD +0.88% typically holds 40 to 60 stocks of companies with the highest DIVCON ratings among the 500 largest U.S. companies by market value. The ETF is rebalanced once a year in December and stocks are weighted by their DIVCON scores (within the broad scores of 5 and sometimes 4). Here’s how it has performed since it was established on Jan. 6, 2016, against the S&P 500:
So the ETF has outperformed the S&P 500 slightly during its life of nearly three years.
In an interview on Oct. 9, Salehizadeh said he would expect LEAD “not to correct as much as the broad market” in the event of a downturn, because of the high DIVCON scores, adding that “they are likely to do better in a rising-rate environment ... because they tend to be growth stocks.”
Here are the top 10 holdings of the Reality Shares DIVCON Leaders Dividend ETF as of Oct. 9:
|Company||Ticker||Share of ETF||Total return - 2018||Total return - 3 years|
|Mastercard Inc. Class A||/zigman2/quotes/207581792/composite MA||2.6%||39%||124%|
|Nvidia Corp.||/zigman2/quotes/200467500/composite NVDA||2.5%||37%||938%|
|Intuit Inc.||/zigman2/quotes/203136605/composite INTU||2.5%||41%||146%|
|Visa Inc. Class A||/zigman2/quotes/203660239/composite V||2.4%||25%||96%|
|Motorola Solutions Inc.||/zigman2/quotes/203308192/composite MSI||2.3%||40%||93%|
|Nike Inc. Class B||/zigman2/quotes/203439053/composite NKE||2.3%||30%||33%|
|Apple Inc.||/zigman2/quotes/202934861/composite AAPL||2.2%||36%||114%|
|Rollins Inc.||/zigman2/quotes/206314900/composite ROL||2.2%||28%||122%|
|Tractor Supply Co.||/zigman2/quotes/202009274/composite TSCO||2.2%||21%||4%|
|Activision Blizzard, Inc.||/zigman2/quotes/200717283/composite ATVI||2.2%||23%||147%|
|Sources: Blockforce Capital, FactSet|
You can click on the tickers for more information about each company, including profiles, news, price ratios, charts and financials.
Here are comments from Salehizadeh about five stocks with DIVCON 5 ratings: