High-Yield Equity

Portfolio Highlights
  • Income Diversification
    Current yield from dividends is higher than investment-grade bonds. In addition, this portfolio provides growth potential for both the income stream and the underlying principal.
  • Attractive Historic Returns
    Portfolio is concentrated and invests in some of the highest dividend-paying companies. History shows that stocks from the 9th decile of yield consistently provided better returns than the broad market.
  • High-Quality Compounding
    High current cash flow allows for the incremental purchase of more stock (dollar cost averaging) and can help avoid negative compounding (selling shares at depressed prices in a down market).
Portfolio Overview

High-Yield Equity is a tax-advantaged, high-yield equity portfolio invested in companies that we expect will continue to pay, and potentially raise, their dividends. The portfolio is diversified by industry, quality, and financial strength without investing in MLPs — so there are no K-1s for tax filing.

Investment Philosophy

Our studies and many others covering developed markets around the globe, including studies by Credit Suisse and professor Kenneth French, have demonstrated that in past history when one sorts stocks by yield, the second highest tier (the 9th decile of yield) offers some of the best risk-reward characteristics for income-oriented investors. Also, studies show that the 9th decile offers the highest income combined with a high risk-reward ratio. Unlike a broad average of stocks, returns for high-dividend deciles have been more influenced by income than by stock price fluctuations. Income is always positive, and that feature helps explain reduced volatility over the long term.

Portfolio Objective

This strategy seeks to produce current dividend yield higher than bonds with an equivalent and lower rating (but unlike bonds, with income that can grow), and higher than other equity strategies generally. In addition, we aim to generate growth potential for both the income stream and the underlying principal with an attractive risk-reward profile.

Portfolio Strategy

We buy only stocks that have among the highest dividends in the market, which is why we focus on companies in the 9th decile of yield. The 9th decile contains many solid companies whose business plan includes substantial payouts to shareholders, as well as the occasional deeply oversold stock that has become a “temporary” high yielder. There may be exceptions, but the 9th decile appears to be the most fecund soil, we think, for finding companies with reliable high income.

Strategy Inception Date: April 2006
Portfolio Manager: MHI Investment Team

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