Can This Dividend Portfolio Keep Outperforming? (The Seeking Alpha Growth and Income Portfolio)

Over the years, I've made hundreds of YouTube videos and posted hundreds of articles to dividend.com. And the reality is this is because I do an incredible amount of research into stocks. I've read thousands of articles and done countless hours of research, but one of the platforms I've always used to read articles is Seeking Alpha. In fact, occasionally when I have the time, I even write articles for them myself. But Seeking Alpha actually just released a new feature that I've been keeping up with closely, the quant growth in income portfolio. This is a portfolio that has the goal of long-term capital appreciation, consistent dividend income, and reduced exposure to dividend cuts through seeking Alpha's dividend safety grades. The portfolio has only been around for a few months now, but it's already destroying its benchmark VYM significantly. I wanted to learn more about this portfolio, so I actually reached out to the Seeking Alpha team and requested an interview with Steven Crest, who was the head of the Quant team, who runs the portfolio. Steven's in charge of the quant at Seeking Alpha, as well as all the grades that we've seen over the years, and they did agree to let me have an interview with him. So, in this video, we're going to be taking a deep dive into the Quant growth and income portfolio. And while I did decide to post this video to the Dividendology channel, if you enjoy the interview style video, be sure to check out the Misprice podcast. I've been doing interviews with fund managers, CEOs, and market experts, and the feedback so far has been incredible. So, be sure to check out the Misprice podcast. But with that being said, let's go ahead and dive in. All right, welcome back everyone. Today I am joined by Steven Crest, the head of quantitative strategies at Seeking Alpha. Some of you may be familiar with Steve, but if you're not, you're probably familiar with his work. Steve is the architect behind Seeking Alpha's quant rating system and its quantitative investment portfolios, including the recently launched growth and income portfolio, which is designed to identify stocks that combine strong fundamentals, attractive income, and long-term capital appreciation potential. So, Steve, thanks for joining me. >> Absolutely. Thank you for having me today. Really appreciate it. >> Steve, we're super excited to have you. And there's a lot I want to get into, but for people just discovering you for the first time, give them a little bit of background on how you ended up at Seeking Alpha. >> Yeah, absolutely. Well, I've been in the world of finance for over 35 years. Um, the bulk of my career was spent at Morgan Stanley. I worked there for 13 years running a quantitative prop desk and I also uh worked at Northern Trust Global Investments that as a head of international. I also founded a hedge fund which was based in quantitative strategies. And when I was running the hedge fund, I also founded a fintech company which more or less was uh one of the first robo analysts where you could go to your platform and put in a ticker symbol and it would give you an immediate directional recommendation based on fresh data. And Calpha liked that so much that they acquired the company in late 2018. And that is what brought me here today. uh pretty much the architect of the quantitative system at Seeking Alpha, the uh portfolio products, Alpha Pix, the ProQuant portfolio, and as you just mentioned, our newest addition in June, the Quan growth and income fund. >> You know, it's incredible to think how many investors eyeballs have been on your work over the last five years, really over the last, I guess, six or seven years, however long you've been at Seeking Alpha now, um with the Quant rating system. It's just mind-blowing to think about. And I do want to take a deep dive into the quant growth and income portfolio because obviously there's a lot of people watching who consider themselves dividend growth investors. But I do want to get your perspective on a few things in the market right now. I think a a lot of investors are curious your your opinion as to simply whether or not we're in an AI bubble right now. Obviously um a lot of speculation going on, a lot of strong opinions in that sense, but we'd love to hear your opinion on that subject. >> Yeah. Well, I I think you could look at it from a near-term perspective and a long-term perspective. Uh probably back in the May or June point, we could say there was a a bit of overvaluation in many of the AI names, not all of them, you know, like most stocks, uh and especially within technology. Some are extremely overvalued on their, you know, conventional valuation metrics and others are not as overvalued. But certainly, uh some of the steam has been let out of the system since that period of late May and early June. the socks index at one point uh which is the Philadelphia uh semiconductor index right was 25% off its 52- week high uh I believe now that level is like below 20% so over the last week a number of the stocks have rallied back I would say even looking at the names that offered a solid solid valuation framework most of those stocks had weakened as well and it's sort of like a you know a r a falling tide brings down all ships and not all ships are built the same, but it's still going to bring all ships down. And I think that's what has happened over the near term. We're at a point now, especially on the back of Nvidia reporting, you know, excellent results and that stock up 6% today. Uh a number of the names are rebounding and a little bit mixed as uh President Trump announced that there potentially could be a tariff on uh semiconductor companies outside of the US. So that has weakened a number of the stocks off of that speculation, but there's nothing solid there. At the end of the day, uh I believe a lot of these stocks will rebound from their lows. Earnings have been fantastic. Uh topline numbers, bottom line numbers, many of them are beating expectations and we have a handful of AI companies that we recommend where we believe on conventional metrics, they're very cheap, but the growth is very, very strong as well. So near-term, I'd say that Steam was let out of that bubble and we're probably entering closer to a rebound phase. >> So is there still any similarities, if any similarities at all, with the.com bubble and where the market's at right now? >> There are definitely similarities. It's a great question. Uh I mentioned sort of that nearterm uh bubble potential. the long-term bubble potential. I don't think [clears throat] we're at a point where we're close to where TMT was in 99 and 2000, but I will say there are absolutely like disturbing signs that are very very similar. And mostly that's the very large um scalers as well as companies like Nvidia and Broadcom that are starting to proide provide creative financing now to uh the smaller supply companies and smaller infrastructure companies that is definitely reminiscent of what we saw during the TMT bubble. There are some major differences. uh number of the companies that are providing financing now they are way bigger than the companies were in the TMT era they have a lot more cash on hand and they're also not really becoming sort of the sole provider of the creative income they are bringing in um asset management companies venture capital companies so there is a little bit more diversification in the source of the financing than we found back then and companies with better balance sheets but I would look to you know, as we progress, you know, I'd say a year and a half, two years, three years down the road, uh, if I had to make a comparison to the TMT error, I'd say we're probably in like the 1997 phase. We're not at that point where we got to like 99 and 2000, but there are early disturbing signs. Companies that traditionally are not finance years are sort of entering that realm. So, that is definitely a major flag that goes up. >> Yeah, that's interesting. I think a lot of people will be surprised to hear your opinion on that. Now, with that being said, it actually makes it a really interesting time to launch the Quant growth and income portfolio, I would argue. And I'm I'm looking at some of the key holdings in the portfolio right now. And some are arguably somewhat AI related, such as maybe Texas Instruments, but I'm seeing a lot of real estate in the portfolio. I'm seeing um some energy stocks in the portfolio. I think you could potentially argue this is almost a hedge against that AI bubble bet potentially. And I'm I'm looking at the performance since inception. It looks like the benchmark is the Vanguard High Dividend Yield Index up about 3% since inception while the Quant growth and income portfolio is already almost up by 12%. So it is a a pretty large amount of outperformance in a relatively short time period. Now I'd argue, you know, short-term time periods don't mean a whole lot, but it's definitely an exceptional start. With that being said, I'm seeing the average dividend yield right now at about 2.9%. But I think what a lot of people are going to be interested in is what will that future dividend growth look like? Because it's a solid starting yield, close to 3%. But the underlying holdings have an average dividend growth rate of around 10%. And as you know, Steve, that snowball effect really starts to take place even from an income perspective when you're hitting dividend growth of 10%. So I'm I'm curious, is there a target dividend growth rate for the underlying portfolio? maybe just take a step back and tell us what are what are the ultimate goals for this portfolio. >> Uh yeah, I I [clears throat] would actually say that is not a target and that may seem counterintuitive. Um however, being from the quad side, I know if you focus too much on companies, um it's sort of like a dividend yield. You know, if you chase a high dividend yield, that implies more risk. It's almost the same. If you're really chasing a very high uh dividend growth rate, that can often put you in the danger zone. So you want to be a little bit lower than that. [clears throat] So with that is not really an area that we target. What we target first and foremost is capital appreciation. So it has to have a quad strong buy and second and almost equal are the stocks that we choose for the portfolio have to have a dividend. Now what we do is we do target a range um where we want the overall range for the portfolio to sort of be within 50 basis points of that Vanguard high yield index ETF. Now a lot of investors might say a dividend yield of 2.9% or 3% or the Vanguard index I think is only actually like around uh maybe at one point when we started it was like 2.2%. I think the yield is a little bit uh higher on the product now, but a lot of people would view that as a low yield. I view it sort of as a sweet spot of getting uh you know an okay yield, but also getting the capital appreciation potential as well. So, we're going overall for a total return, but the components have to be long-term capital appreciation and income generation. We're not targeting a high yield and we're not targeting a high dividend uh per share growth rate for the company. So, it sort of has to fit in the sweet spot. >> Very nice. One second, Steve. I'm Your internet's being glitchy, so I'm going to give it a second to catch up. >> Okay, thanks. Apologies. >> No worries. I think it'll still come out clean, but we'll see. So, I'm going to go ahead and jump back into it. So, Steve, a lot of the time investors can outperform in the short term by strictly buying, you know, more highly volatile names, names that typically have a larger beta. One of the things I noticed with the quant growth and income portfolio is like we did point out the performance has been strong in the short term, but the average beta for the stocks in the portfolio is only 0.59. So based on what you just told me, I think I know what your answer is going to be, but I assume a low beta is just a natural consequence of the stocks you're adding to the portfolio. Again, that's not something you're intentionally targeting. Is that correct? >> That is correct. But um it I think it's a combination of having companies that have a a decent distribution in terms of their their dividend allocation but also uh very much focusing on their earnings growth as well. Um so I think by that nature it provides a little bit of a better beta than if you were to go into a strictly a growth product. Um, and when comparing to the S&P 500, you have companies there that don't pay dividends and you have companies that do pay dividends. So, if you were to, you know, separate the dividend payers from the non-ividend payers, you'd probably have a more attractive beta as well. Again, we're not targeting it, but I think it's a function of what we look for in the portfolio. And I should mention outside of those primary factors of uh long-term capital appreciation being a quantum buy and the income generation when we do look to select a stock uh whether it's for Alpha Pix or the ProQuan portfolio or for QGNI there have to be like five core characteristics. Uh so the stocks collectively the way we rate them have to be strong on value growth profitability positive analyst EPS revisions and momentum. What you get with QGNI is you're also adding the dividend distribution on top of it. And within that dividend framework we have another proprietary set of grades that we look at at CK Alpha. They are dividend grades. Uh there really no other platforms that I'm familiar with that have those type of dividend grades. and we're looking at dividend safety, dividend growth, dividend consistency, and dividend yield. And for each of those uh safety metrics, there's dividend metrics, we score them relative to the sector. So, particularly for dividend safety and dividend growth, it has to have a rating that you know falls somewhere say like in the B minus to A+ range as an example. I'm not giving the exact grade levels, but in essence, we're looking for companies where we have a lot of confidence that they will not suspend or cut their dividend, and we get that through the dividend safety grade. >> That's a great explanation. And I think really you gave an answer that a lot of people were curious about what all actually goes into the quant rating because obviously that's what's driving the whole portfolio. Now, one of the things I've noticed traditionally with Seeking Alpha's Quant ratings is they're heavily momentum favored. I'm wondering are the waitings for those quant ratings for this portfolio the same as the traditional quant um or is you know does momentum get less of a weight in this type of portfolio? Um well for the for the regular quant we have the five investment characteristics that we look at. Uh what tends to happen is momentum uh by and large historically is the best quant factor. you have empirical data that goes back almost 250 years that shows momentum is a better predictive factor than valuation metrics or profitability metrics or growth metrics. So it's not that we have an extraordinary waiting on it but it's the fact that that metric does so well in itself but again we have the value there we have the profitability right >> um so they're not equally weighted but they are weighted then when you look at QG and I um we are looking at the dividend grades as well so that actually really the way to look at that is it provides more diversification with the regular quant we have those five core investment characteristics and then with QGNI we also have the dividen dividend safety and dividend growth metrics on top of it. So that's adding further factor diversification. And uh in my book over the long term, you know, the best way to uh have a maximum return is through diversification and minimizing risk is through diversification. So they go hand inand with each other. So the more factors I can have the better. There's a sweet spot. You don't want to have too many otherwise it becomes too dilutive. But we have seemed to hit and we back test all these metrics. say back tested to 2010 or 2015. So we know which ones are more predictive. We know the optimal size of how many factors you want, what's too little, what's too much, and we do all the work for our uh subscribers. >> That's awesome. One of the things I also noticed is when looking at the portfolio history, obviously it's still a young portfolio, but there's already been six positions that have been exited from the portfolio. All of them have posted relatively strong total returns, ironically enough. So, I'm curious what goes into or we understand what goes into adding the stocks to the portfolio. What would cause a stock to be removed? Uh could be overvalued. Uh typically, uh you could look at the overall rating for a company. Um and what we try to do is bring in companies that have strong buy ratings or buy ratings from the quant system. U if a stock were to drop to a sell or a strong sell, it would be removed from the portfolio immediately. If it drops to hold, a hold doesn't mean sell. Hold means hold. But what will happen after a certain number of days, um, we'll make room for the the stronger and higher ranked companies. So, but we'll keep a hold in there for quite a while. Uh, not quite as long as Alpha Pix. Alpha Pix will maintain a hold in there for 180 days. Uh, we don't go that long with QGNI, but we will maintain holds in there. So those are, you know, the um probably the top factors that will contribute to it being removed is that cell or being in a hold for a certain period of time. Uh you'll also see valuation frameworks change. So we refresh our quant every single day. So that means every day you get a fresh directional recommendation, you get fresh valuation metrics, fresh growth metrics. So with every tick and every day that occurs, we will update our model. So that's an important thing to watch out for. and the valuation framework's expensive or the growth doesn't look as attractive, it will come out. >> Yeah, that's a great explanation. I I'd love to talk about the benchmark here for a moment as well because I'm looking at the Vanguard High Dividend Yield Index Fund. It's currently yielding around 2.2% and like we mentioned earlier, the forward yield of the Quant growth in income is sitting roughly at about 2.9%. How did you decide on the Vanguard High Dividend Yield Index as the benchmark versus maybe an SCHD or DGRO? >> Yeah, we looked at a number of them and we wanted uh you really it was quite simple. We wanted one that was one of the largest ones out there. Makes >> sense. >> That was well known. >> Um and if if it was a had a lot of AUM under management, we felt like that could be sort of a good comparison for a broad index. Originally, we were going to look at the VIG, which is the uh Vanguard um income and growth. That's a little bit bigger than the Vanguard high yield, but we wanted to sort of uh bring the benchmark up, bring our standard up a little bit more. So, we wanted to be able to fight for a little bit more yield. Uh because our yield was for a long period through our back test, it was significantly higher than VIG. uh with the Vanguard high yield index, what we found is when we initially did our back tests, um our yield was actually lower until the point where we decided to include REITs. And around 2019, we included REITs, we added that sector. And when we added that sector, uh the yield moved substantially higher from what it was. And ever since that period, like in 2020, we've consistently had a higher yield uh than the Vanguard High Yield Index ETF. And um you know that that gives us pleasure that we could be providing a yield that's a little bit better than one of the most popular ETFs that's out there and without question our uh the capital appreciation the total return question crushed it. >> Right. I think that makes a lot of sense. Obviously I think the yield needed heavily depends on the goals of the individual investor but I do think that's a sweet spot for a lot of people. you know, something above or in the range of 2 to 3% is a great area to start if you're able to compound it with dividend growth of seven, eight, nine, or even 10%, which right now the portfolio is doing that obviously with strong total returns. So, a couple more quick questions before you go, Steve. How much trading should we expect in this portfolio moving forward? >> Yeah, so um our intention here is to rebalance it um every two weeks in essence. So every other Wednesday we rebalance the portfolio and typically on average we find that we bring in uh two stocks per rebalance. Uh initially you know whenever you start uh a portfolio like this the trading is a little bit slower because it has to sort of digest the new names. A certain time period has to occur uh and then after a while it'll start to kick in. and you'll have like one new name, one cell, uh, and eventually we think on average for each rebalance, we'll have uh, two new names coming in the portfolio and two names leaving. So that's what our historical back test showed going back to 2015. That was the >> we appreciate that insight. So one more question for you, Steve, before you go, give us one stock right now on the market that you currently believe is mispriced. >> Okay, so this is not part of uh, QGNI. >> Okay. Uh I will go based off of uh a stock that we really like a lot in terms of from a quant perspective. Um there's SanDisk. Uh the stock uh when you look at it on our metrics, it has straight A's across the board for value, growth, profitability, positive analyst, CPS revisions, and momentum. The stock has come off uh fairly significantly from its 52- week high, and yet it keeps crushing it. every time they come out with their earnings announcements, they're having record uh topline and bottom line. So, the stock is really being driven by sentiment and I really look at this as a fantastic opportunity to get in at this level. So, Zandisk would probably be my number one recommendation. >> That's awesome. Well, Steve, we appreciate so much you taking the time to be on the channel today. This has been very insightful. We'll have to have you back on the show again sometime. >> Anytime. Thank you. >> Yeah, we'd love it. Steve, thanks so much.