We believe the best way to reduce risk and enhance returns is to construct concentrated portfolios of high-quality dividend growth companies. At Raub Brock Capital Management, we manage traditional long-only equity portfolios based on the following factors:

Quality. We start our decision-making process with an elite group of financially strong companies. In times of increased volatility, investors tend to move toward higher quality equity securities, supporting their prices and making them less volatile than alternative investments. These exceptionally strong companies have proven that they can hold up through tough economic and market conditions with less price volatility.

Dividends Matter. At RBCM, dividends matter – a lot. In fact, in our core equity portfolio we invest only in companies who pay generous dividends, have a track record of consistently raising those dividends, and have every likelihood of continuing to increase dividends. We believe there are five main benefits to investing in companies that grow their dividends:

  • Dividends provide a clear signal of corporate financial health. Dividends enhance earnings transparency of a company and exert a level of financial discipline on management. They also increase corporate accountability and can be a signal of management’s confidence for future growth prospects.
  • Provide a significant source of total return. Dividend paying stocks offer the potential for both capital growth and income. Reinvested dividends have accounted for nearly 50% of equity total return since the 1930s.
  • Lower relative volatility. Dividends have helped buffer portfolio losses when equity prices have declined. Across longer time horizons, dividend-paying stocks have produced stronger returns with considerably less risk than non-dividend-yielding securities.
  • Higher returns regardless of interest rate movements. Regardless of how the Federal Reserve alters monetary policy, dividend-paying stocks have historically outpaced their non-dividend- paying counterparts.
  • Downside protection during turbulent market cycles. Dividend-paying stocks have outperformed non-dividend-payers through both bull and bear markets. This pattern has been even greater for stocks that have grown their dividends over time.

Stocks represent an ownership interest in a business. At RBCM, we view stocks for what they are: an ownership interest in a business led by managers who view us as co-owners. We do not sell a company just because news headlines trumpet a macro-economic or political concern. We do not use market timing tactics. We focus on the business fundamentals that dictate the ability of the company to exhibit a consistent pattern of dividend increases greater than that of the market as a whole and whose business execution should, in Raub Brock's judgment, allow them to continue to raise their dividends.

Focused Portfolio. Our portfolio typically holds between 20-25 companies. This focused approach has several advantages. The first is that our winners make a real difference in performance. If a stock doubles in a portfolio of 50-100 companies, the impact on performance will be small. While concentration can be double-edged sword, our track record has proven that properly diversified portfolios with carefully selected companies can result in sound portfolio performance with less volatility than the market. Although our portfolio is relatively concentrated, we rarely own more than two stocks in the same sector or industry.

Low Portfolio Turnover. Our annual turnover averages about 25%, which means that we hold stocks for about four years. This turnover reflects the ongoing process of trimming oversized weights and selling certain stocks in favor of a more compelling ones. A 25% turnover in a 20-25 stock portfolio means that all we need are 4-5 new ideas per year. This allows us to wait patiently for the more attractive opportunities. Furthermore, taxes can be one of the greatest obstacles to building capital, and low turnover produces attractive after-tax returns.

Patient Approach. Benjamin Graham, the great-grandfather of investing and Warren Buffett's mentor, said, "In the short run, the market is a voting machine (influenced by popularity), but in the long run, it is a weighing machine (a measure of value)."

Stock prices in the short run may react to world news, rumors, analyst recommendations, forced selling by institutional holders facing redemptions, or speculative buying by momentum-driven investors – none of which has much to do with the underlying ability of the company to continue generating cash flow or its related underlying value. In the long run, however, stock prices track closely with dividend growth, earnings and cash flow.

We begin every investment as if we plan to own it forever. Adopting this attitude directs us toward quality companies that who treat us like true owners, and who share their earnings through dividends. Since the stock market takes such a short-term view of investing, it also creates opportunities to purchase some wonderful companies at great prices. When they run into temporary difficulty, as all companies do, the market often lowers the stock prices on quality companies that we know will grow successfully for decades to come. This creates low-risk opportunities to enhance long-term returns for our clients.

Occasionally, it takes quite a while for the market to recognize these undervalued situations. Our long-term view allows for these times when patience is needed, and our investors continue to benefit from the dividends our companies are paying – and increasing.