Benchmark – There is no “perfect” index; we suggest using both the Russell 3000 Value Index and the Dow Jones Select Dividend Index.
Return Objectives – To generate returns equal to equity indexes with 50% to 75% of the return coming from cash dividends.
While there is not an ideal or intuitive benchmark for this strategy, we encourage clients to use both the Russell 3000 Value Index and the Dow Jones Select Dividend Index. This portfolio will hold a variety of types of securities and the objective is to generate returns over time that are equal to broad market equity returns, with between 50% and 75% of that return coming from cash dividends.
As with our Value strategy, Mark Eveans is the lead portfolio manager for Yield-Focus, supported by a team of 4 additional analysts. The team utilizes the same value-driven quantitative research and a qualitative overlay is made for all final portfolio decisions. The largest allocation in the portfolio will usually be to common stocks (all with a minimum yield above 4%); however, we may also hold meaningful positions in the following other types of securities: Convertible Preferreds, Income Oriented ETFs, REITs, Master Limited Partnerships, Royalty Trusts, Canadian Income Trusts, Straight Preferreds, and cash.
Although generally considered to be less risky than the broad equity market due to the significant component of return coming from cash, volatility in a yield-based strategy can be meaningful at times. This can be driven by a rising interest rate environment which pressures stock prices to compete with higher rate structures, an economic environment that causes rate spreads to widen and the fact that some of the holdings in the portfolio are thinly traded which can cause meaningful short-term gaps between bid and offer prices.
That said, we opened this strategy in 2003 based on our recognition of the power of the dividend in long-term investing, the excellent diversifying qualities of the strategy and to meet above-average income objectives of a growing number of investors.
We use the same 13 factor equity model that is used in the Value Equity strategy, plus we have developed additional customized screens to evaluate non-traditional securities such as Master Limited Partnerships and Convertible Preferreds.
This involves rigourous credit work to fully understand the safety of the dividend. We also consider and active allocation opportunities between security types to capture the most attractive risk/return relationships. Portfolios will hold 40 to 50 securities and our turnover, though variable from period to period, has averaged about 45%. This portfolio searches the globe for quality income opportunities and will invest up to a third in non-U.S. holdings and also invests fully across the cap size spectrum.