Few movie scenes are as unexpectedly heartbreaking as the scene in Cast Away when Chuck Noland (Tom Hanks) watches his only companion—a volleyball named "Wilson"—drift out to sea, crying, "WILSOOOOOONNNNNN!"
Cast Away captures the human drive to meet basic needs, progress toward safety and belonging, and ultimately reach self-actualization—a vivid illustration of Maslow's Hierarchy of Needs:
Figure 1: Maslow's Hierarchy of Needs
DCM's Hierarchy of Income Needs
We can reframe Maslow’s theory to apply it to your investment portfolio. If you’re retired, this applies to you today. If not, you’re working towards it. For the purposes of this letter, we’ll focus on retirement income—whether you’re currently retired or planning for it. For most of you, your income in retirement will look something like this:
- Base Level: Needs
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Figure 2: DCM's Hierarchy of Income Needs (Needs)
The base of your retirement income pyramid is your ‘Needs.’ These are the must-haves: food, water, clothing, healthcare, and personal safety. The first step to any retirement plan is to ensure that these essentials are met with very little risk. The income you need to meet these basic needs should be guaranteed or close to it. For most retirees, these needs are met through a combination of Social Security, company pensions, or interest from fixed-income strategies like our Preservation of Capital. While these strategies aren’t going to grow your long-term wealth, that’s not their purpose. These provide the basic income required to provide protection against poverty.
- Next Level: Wants
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Figure 3: DCM's Hierarchy of Income Needs (Needs & Wants)
Once 'Needs' are secure, we move to 'Wants'—non-essential but desirable experiences that support relationships, self-esteem, personal growth, and provide comfort and convenience.
The ‘Wants’ are where our Rising Dividend Cornerstone™ strategy is tailor-made: it currently generates a generous, above-average dividend income that is well-covered by the companies' underlying earnings. We expect this dividend income to grow over time above the rate of inflation. If it does, your retirement spending can also increase without selling shares.
A rising income stream of dividends also tends to drive prices higher over time, producing what we call "predictable price growth." While these price increases aren't as reliable as dividend income, we do expect them over the long-term.
- Final: Legacy
At the very top of the pyramid, we have ‘Legacy.’ This is the final stage of a fulfilling retirement.
Figure 4: DCM's Hierarchy of Income Needs (Needs, Wants, & Legacy)
The ‘Legacy’ bucket is where we start to think about ways you can make a positive contribution to other people's lives: your kids, grandkids, community, church, friends, other family members, or people less fortunate than yourself. These are aspirational goals, like paying for your grandkids' college or building an orphanage in South Africa. Are these things required? No. Could you live without them? Yes, but we find that many of you long to leave a lasting legacy for others.
And that is where we found that our investment menu was lacking. Many of you had your ‘Needs’ and ‘Wants’ covered by your particular mix of Social Security, pensions, Preservation of Capital, Rising Dividend Cornerstone, Income Builder, and other income sources. Still, you wanted a more aggressive, potentially higher total return strategy to build toward a lasting Legacy.
For those of you still accumulating for retirement, you were also looking for more exposure to a total return-focused strategy.
More Growth
Our investment philosophy has long been focused on three pillars:
1. Security—companies with strong balance sheets and consistent profitability,
2. Income—companies that pay dividends, and
3. Growth—the growth of underlying fundamentals, which we expect will ultimately lead to growth in price.
Each of DCM’s strategies prioritizes those three pillars a bit differently:
- Cornerstone prioritizes Security first, followed by Income, and, with Growth as the last priority.
- Income Builder puts focus on Income first-and-foremost, then Security, and lastly Growth.
- Capital Builder focuses on Security first, then Growth, and finally Income.
Across all those strategies, we had no strategy where Growth was the #1 objective.
So, we designed a new strategy from the ground up. In May 2021, we launched a new strategy that would later become "Sequoia." The stated goal of Sequoia is to outperform the S&P 500 Index, net of fees, over the long term.
Unique, but Familiar
We wanted Sequoia to be unique in its approach, focused on aggressive Growth, but also true to DCM's investment philosophy that we've held for decades.
At its core, Sequoia shares the philosophical roots (pun intended)with our other strategies, but it differs in one significant way: Sequoia is entirely quantitative. We designed an algorithm, which we call “CAMP.” (More on that in a minute.) The stock with the highest score is added to the strategy.
For the balance of this letter, we'd like to share that methodology with you. As we do, remember that our intent here is not to convince you to invest in Sequoia; we merely want to educate you on something that may be of interest. At minimum, we hope the discussion below can help you understand a bit more about our investment philosophy for all strategies, not just Sequoia.
Investable Universe
An essential part of any investment strategy is first defining your investable universe: what types of stocks will you invest in? In Cornerstone, for example, we apply dividend, financial strength, momentum, and size filters to end up with a list of roughly 100 to 150 stocks to build Cornerstone out of.
Sequoia’s investable universe is a list of the top 50 stocks ranked by hedge fund conviction. We define "high conviction" as owning at least 7% of a stock. For example, if there are 90 hedge funds that own a 7%+ position in Nvidia (NVDA), NVDA would get a 90. The top 50 stocks by hedge fund conviction score make it through into our investable universe.
From there, we apply our proprietary "CAMP" scoring system to determine which 20 stocks should make the final portfolio. We split up the "CAMP" score as follows:
- Competitive Advantage: 40%
The hallmark of all great businesses, whether public or private, is a competitive edge over their competitors.
In Cornerstone, the bulk of our investable universe has some kind of competitive advantage. Out of about 6,000 stocks on U.S. exchanges, only 66 —less than 1%—have increased their dividend for 25 or more years.[1] What enables a business to succeed where 99% fail? This kind of rare business result indicates some sort of rare business input: a product, service, culture, leader, or some combination of all these that makes it difficult for competitors to match.
Sequoia estimates competitive advantage by scoring each company on its ability to convert invested capital into sales and profits, a hallmark of companies with some kind of competitive edge. Competitive advantage is an essential part of any great long-term investment. It is 40% of Sequoia's algorithm.
- Momentum: 40%
Newton's first law of motion tells us that an object in motion will stay in motion unless acted on by an outside force. If your son throws a rock at his sister, that rock will tend to move until it hits the target. (This is an entirely hypothetical situation, of course.)
Stocks, like rocks, tend to follow similar patterns. Decades of research show that the best (worst) performing stocks from the last 6 to 12 months are more likely to continue to be the best (worst) over the next 6 to 12 months. The same thing applies to fundamentals: companies with accelerating (decelerating) earnings tend to outperform (underperform).
Where competitive advantage tends to drive stock performance over the long term, "Momentum" tends to drive stock prices in the short-to-medium term. All else being equal, Sequoia wants to own companies whose earnings expectations are accelerating, and they are closer to hitting 52-week highs than lows. Momentum accounts for 40% of the formula.
- Predictability: 20%
Even going back to the early days of DCM, technology and innovation have long been a part of our decision-making process.
In “The Hidden Power of Rising Dividends”, Greg Donaldson shares the history of our statistical models. In early 1991, Greg was searching for a way to estimate the fair value of the Dow Jones Industrial Average. To do that, he built a statistical model that used a combination of interest rates and dividends to predict the price. While the techniques and variables of those models have changed over time, we still use the core principles of those models today.
The tightness of the relationship between prices and fundamentals is called "R-squared." A higher R-squared indicates a stronger relationship between prices and fundamentals. Ideally, we would like to invest in companies where both the fundamentals and prices are moving higher in a similar direction. Companies with high correlations receive high "Predictability" scores in Sequoia, which makes up 20% of the formula.
Is Sequoia for You?
As much as we'd love to make a strategy that provides all things for all people, that's simply not possible. By pushing Growth to the maximum, you naturally sacrifice on Security and Income. There is no single strategy that can do it all; we want to customize your specific portfolio to meet your needs.
That may mean pushing Growth a little higher, Security and Income a little lower, or it may not. If your Needs and Wants are securely funded and you wish to be more aggressive with your Legacy bucket, speak with your advisor to determine whether Sequoia fits your plan.
1. Dividend Aristocrats List. (2025, September 30) Stock Analysis
https://stockanalysis.com/list/dividend-aristocrats/
This article, written by Nathan Winklepleck, Portfolio Manager & Analyst and member of our Investment Policy Committee, was featured in the Fall 2025 edition of the Rising Dividend Report.
This has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.
An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
