The entire nature of dividend growth investing does not lend itself well to technology stocks. Why? Because technology stocks are typically high-growth, and with high-growth stocks you want to reinvest your profits into growing the company instead of paying dividends. With that said, the stock with the highest Q-Score across our entire universe of stocks at the moment is IBM with a Q-Score of 22.25. Let’s take a closer look at what stocks we want to purchase in the information technology sector.
First we screen all stocks in information technology that have increased dividends for 20 years or more.
Per our investment methodology rules, we exclude the 3 stocks above that have market caps less than our $10 billion cutoff. This leaves us with just three stocks to evaluate, the Q-Scores of which can be seen below:
Adding IBM to our Quantigence DGI portfolio is a no-brainer here. We’ve read countless debates on Seeking Alpha about whether or not IBM can turnaround their company and we don’t care about all that background noise. That’s precisely the reason why we developed the Q-Score. We simply want to look at the metrics which help indicate the likelihood of the company increasing their dividends to us in the future.
The real question here is which of the two remaining information technology stocks, ADP or LLTC, do we add to our portfolio? Typically we like to see Q-Score within a range of 15 to 20 with the exception of “safe” sectors like utilities. This means we’ll only look to add 1 more stock to this sector in addition to IBM. Since the Q-Scores for ADP and LLTC are so similar, how do we choose which stock to add? The answer is that we look to add the stock which will have returns that are the least correlated to IBM based on what business lines these two companies are in.
Both IBM and ADP sell software and services to businesses. While IBM does sell some hardware solutions, this segment accounts for just 10% of their revenues at the moment. On the other hand, LLTC is in the business of building and selling semiconductors and devices. In this case, we’re going with LLTC simply because the type of business they operate in is distinctly different from both IBM and ADP.
As for IBM, we’ve been accumulating a position for a while now as seen below:
As you can see, we went against our own advice and tried to time the market on 3 separate occasions in 2015 by pulling the trigger on much larger buys than our regular monthly purchases. This is speculating and removes all the objectivity behind “dollar cost averaging (DCA)” which is the regular purchase of a fixed amount each month regardless of what the stock price does. We’re going to try and stick with DCA going forward because that’s what Quantigence is all about; “Dividend Growth Investing Quantified“. We want to take the emotion out of investing.
In order to hit our target position size of $13,333 for both IBM and LLTC, we’ll need to make the following monthly allocations:
- LLTC: $550
- IBM: $100
We’ll look to revisit the information technology sector occasionally, and if the Q-Scores for ADP and LLTC diverge to such an extent that we can’t justify holding LLTC, we can look to switch the two. With that said, portfolio turnover is extremely undesirable so we would expect that sort of event to be very rare. A great deal of analysis would need to be performed first to determine that a switch would be the right thing to do given that our timeline for holding our 30 stocks is indefinite.