Our High-Yield Equity Income portfolio invests in common stocks, preferred stocks, MLPs and REITs. Stocks are evaluated using a blend of value and growth principles, however the main emphasis is yield. Therefore, the majority of this portfolio's return is expected to come from the holdings high-yields. While seeking some appreciation potential the portfolio assumes that the investment capital can be recovered over time as securities are sold. Simply, winners and losers will net-out.
The Equity Income portfolio seeks to own companies with significant dividend income as well as growth potential. It attempts to achieve consistent total returns through a diversified portfolio of common stocks with above-market dividend yields, master limited partnerships (MLPs), real estate investment trusts (REITs), convertible preferred and preferred securities.
We screen investments based on a variety of valuation and quality factors. Valuation factors include price-to-book, price-to-earnings, price-to-cash flow, dividend yield and intrinsic valuation or fair price. Quality factors include debt-to-capital, earnings stability, dividend stability, return on investment capital, return on equity and sales growth. After finding stocks using our screening methods, we complete comprehensive fundamental research and assign a proprietary investment grade.
We weight holdings in the portfolio based on our confidence in each position. Holdings with the greatest financial power and most attractive valuation will be weighted at the highest percentages. We typically will own 1-12 positions. Although not common, it is possible to have 100% of the portfolio in 1 position. The portfolio will be rebalanced monthly in our best ideas.
We hold a position in the portfolio until either the business fundamentals weaken, the shares become overvalued or we find a better investment. The most common reason for a sale is that we find a better idea.
We are not market timers but we are not afraid to hold cash. At times, we may have large cash positions. Cash allows us to take advantage of volatility in the market. In our opinion, the value of cash rises when market volatility rises. Thus, when the stock market proved volatile it provides an opportunity to buy wide-moat companies at bargain prices, we will be ready with cash in hand to take advantage of the irrationality. Cash positions are determined monthly based on the amount of investment positions found attractive.