Author: John Gerard Lewis, Gerard Wealth

Covestor model: Stable High Yield

How can an investor make money in this desultory stock market?

There’s been no whiff of a secular bull market since the last century. (It’s reasonable to harken back to the “last century” now, since we’re in the second decade of the following one.) Instead, what we’ve seen since are two or three cyclical bull, and corresponding bear, markets that have brought us all the way up to levels seen in 1999.

For example, on January 6, 1999, you could have bought the Standard and Poor’s 500 through an index fund for about the same price as it closed on on October 31 of this year: 1253.  For many careful, broad-market, index-fund investors, that has meant virtually no gain, except for dividends, for nearly 13 years.

So what is an investor to do now?  Is doing nothing as good as, and less risky than, investing in an equity index like the S&P 500?

Actually, this might be a good time to do nothing, with at least a portion of a portfolio. In fact, a significant portion of our model is designed to do almost nothing, in order to provide ballast for the remainder that is invested in high-yielding securities, such as agency mortgage real estate investment trusts (mREITS) and master limited partnerships.

Our “nothing” component, which consists of low-beta, short-term corporate bond ETFs, is meant to anchor the model against volatility, while the balance of the portfolio aims to throw off substantial dividends and interest. With this strategy, we hope to achieve an average annual performance that approximates the historical return of the stock market.

We know. “High yield” can connote “high risk”.  But in addition to hedging that risk with short-term bonds, we believe the high-yield sector in our portfolio is unlike other high-yield securities. We believe our selections are sound companies whose substantial payouts are simply intrinsic to their business models, rather than reflective of business problems.

For example, the very business purpose of mREITS is to distribute dividends at a yield rate that significantly exceeds that of other income investments, such as utilities, telephone companies and investment-grade bonds. Arbitraging for high yield is what these companies do, and it’s their primary business to manage the attendant interest-rate, inflation and regulatory risks.

Of course, there’s also management risk, so we own as many as seven mREITS in our model, in roughly equivalent portions, to mitigate specific-company exposure.

We believe our strategy can provide good returns in a stock market that seems hell-bent on continuing to do… well, nothing.