The High Yield Portfolio is comprised of stocks, convertible stocks and
convertible bonds.
The investment rationale for following this strategy is to:
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raise the income level of the total portfolio, and
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have the opportunity for upside appreciation from either declining interest
rates or a positive fundamental development in the underlying company. It
differs from our Dividend Growth portfolio strategy, which focuses on a growing
income stream.
Investors can use our new strategy in two ways:
- as part of an equity strategy. If a higher overall yield from the stock portion of a portfolio is desired, a portion of the stock portfolio can be devoted to the ‘Dividend Growth Portfolio’ strategy and a portion to the ‘High Yield’ strategy.
- as a bond substitute. In this case, the High Yield Portfolio could be substituted for all or a portion of the LONG BOND portion of abond portfolio. We emphasize ‘long bond’ because:
- the high price volatility of stocks is closer to that of long term bonds than to medium or short term bonds and
- it is important to differentiate the higher price volatility risk of long bonds from that of short and medium term bonds.
In a balanced bond portfolio, there will likely be bonds maturing through the yield curve and the portfolio’s maturity structure (that is, how much money is invested in 1, 5, 10, 30 etc year bond maturities) depending on your (or your advisor’s) assessment of current interest rate levels and the future moves in interest rates. For instance, in a market where the the yield caurve is relatively flatand interest rates are relatively low , we would suggest having only 20% of a bond portfolio in long bonds. Depending on an investor’s risk profile, it may be appropriate to use the securities in our High Yield Portfolio, but only for that 20% long bond position—the remainder of the investor’s bond portfolio being invested in government or quality municipal/corporate bonds. In our presentation of the High Yield Portfolio we will construct it as a substitute for the long bond portion of a portfolio and utilize a separate Buy List and separate Portfolio listing.
Our strategy has these characteristics:
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the security must yield a minimum of 85% of the 30 year US Treasury Bond yield
(although most of the securities in our High Yield Universe yield more),
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since the objective of this strategy is to generate a high yield, the screening
process will employ less stringent financial hurdles than the Dividend Growth
Portfolio:
- return on equity--a company doesn’t need to generate enough cash to pay a
dividend and grow the company, just enough cash to pay the dividend,
- dividend growth--the strategy is to buy yield not growth in yield, so the
strategy doesn’t require a growing dividend; but as part of the screening
discipline, a company must have never cut the dividend,
- earnings growth—the strategy is not to buy earnings, but to buy enough earnings
to pay the dividend,
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debt to equity ratio--typically, companies with high yields have higher debt
levels.
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the value range (that is the price range between the Buy Price and the Sell
Price) changes and will be narrower than with our Dividend Growth Portfolio
because:
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once a stock in the High Yield Portfolio no longer provides a high yield [our
limit will be a maximum of 50% of the yield of the US Treasury 30 year Bond] it
would become a Sell as a bond substitute irrespective of its outlook as a stock
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since the High Yield strategy will, in general, select less financially sound
companies, we believe it would be imprudent to hold the stocks of those
companies when they reach a price level unsupported by high yield. Therefore,
there is no Sell Half Price, there will be a Sell Price and at that price we
will issue a Sell Alert.
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However, our strict Buy and Sell disciplines (as described in the Pricing
Disciplines page on our website) will not change.
It is important to note that due to the lower financial hurdles used in this
strategy, it is a higher risk strategy than our Dividend Growth Strategy.
Therefore, we recommend that the average size of an investor’s position be only
75% of that used in our Dividend Growth Portfolio (e.g. if the investor’s
average position [3% of the value of the stock portion of the total portfolio]
is $10,000, then the average position in the High Yield Portfolio would be
$7,500).
Details regarding our pricing disciplines may be found here, and the vulnerabilities that we have identified in our strategy can be viewed by clicking on Risk Factors and Caveats.
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