Dividend Income

ESG Dividend Income

Overview: ESG Dividend Income is a Large-Cap equity strategy investing in common stocks and ADRs. It builds on our flagship Matrix Dividend Income (MDI) investment process with an ESG (Environmental, Social and Governance) overlay. A candidate stock is first assessed for its investment merits using our long-standing research and investment process for the MDI strategy. It is only after a stock is approved for inclusion in the MDI strategy that we further explore whether it is also a suitable candidate for the related ESG-DI strategy. All stocks in the ESG portfolio are included in the related flagship portfolio, but not all stocks in the MDI portfolio must be included in the ESG version.

Investment Objective: Designed to be an ESG all-weather portfolio that provides good current and growing income with lower portfolio volatility than the S&P 500 Index. We strive to deliver capital appreciation over time and moderate downside protection. Invest in companies with a demonstrated commitment to ESG principles.

Research Process: Fundamental research on individual companies (both quantitative and qualitative) by our team of four analysts to assess the stability and growth potential of a company’s dividend-paying capability as
well as the current stock price valuation. Additionally, we overlay a supplementary analysis to assess a company’s approach to complying with positive ESG principles.

ESG Overlay: The ESG overlay uses ESG scoring and analysis from Morningstar’s Sustainalytics, an acknowledged leader helping investors identify, understand, and manage ESG-driven risks and opportunities. Sustainalytics provides descriptive risk analysis and numerical scoring of each of the environmental, social and governance “pillars.” Companies that score under 30 by Sustainalytics are judged to be “good”, with lower scores being better. Also, Matrix uses a company’s ESG scores and analysis from Refinitiv, another well-respected provider of this data, as a secondary source. Refinitiv uses letter grades to assess a company’s standing on ESG issues. Companies generally must score under 30 on Sustainalytics to be included in Matrix ESG portfolios. For companies that score at or slightly over 30, we use Refinitiv’s ratings to gain additional perspective on the company’s ESG characteristics. In addition, the Matrix investment team reviews annual ESG/sustainability reports and disclosures provided by companies, noting especially areas of concern that need improvement and progress made to address previous deficiencies. For companies that receive a borderline ranking from one or both rating services, we do a deep dive that examines the pertinent issues on a qualitative basis. This review includes the current ESG status of a company as well as its plans to address any shortfalls. In cases where we believe a company is focused and committed to addressing problem areas in upcoming periods, we will consider the stock for inclusion in an ESG portfolio. If we are uncomfortable with their commitment to ESG principles, the company will not be included in ESG portfolios.

Buy Discipline: Identify mature, successful companies with strong financial characteristics, selling at attractive valuations relative to each company’s intrinsic value, that also have an attractive and growing dividend, with an additional ESG overlay. 90% of the stocks in the portfolio have a current yield in excess of 1.3x the S&P 500 Dividend Yield at the time of purchase.

Sell Discipline: Stocks are candidates for sale under one or more of the following conditions: the dividend is cut; the yield falls below that of the S&P 500; the outlook for future dividend growth deteriorates; the balance sheet materially weakens; the stock price rises markedly above its intrinsic value price; or the ESG performance of a company in a portfolio declines below acceptable levels, unless the company’s plan to remediate the issue is deemed reasonable and timely by Matrix.

Risk Management: Monitor and assess the contribution to total portfolio risk relative to the goals of high current income, modest capital appreciation and moderate downside protection. Risk is evaluated at 5 levels – security, industry, sector, portfolio, and ESG overlay.