Equity Income Strategy

Equity Income FACTSHEET

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The Equity Income Strategy is best suited for clients who seek income through dividends as a significant component of portfolio total return, have a long-term investment orientation, and look for less downside portfolio risk. The strategy aims to deliver competitive returns over a full business cycle by building a portfolio of low-volatility, dividend-paying companies with above-average income yield and dividend growth.

  • Our primary investment objective is to construct a portfolio that will generate competitive returns versus the major market indices over a business cycle while assuming significantly less downside risk. We view capital preservation during difficult market periods as critical to the achievement of this goal.
  • Our investment philosophy stresses the benefits of a diversified portfolio of high-quality companies with a proven track record of long-term earnings and dividend growth.
  • It is our belief that the potential for a predictable source of income in dividend paying companies serves not only to reduce portfolio volatility, but also enhances long-term portfolio performance through a combination of price appreciation and dividends. Returns for the S&P 500, dating back to 1926, show that dividends represent over 50% of the total market return.
  • We subscribe to the notion of reversion to the mean: the idea that asset prices tend to move in wide swings above and below their fair value, but eventually move back toward their historical norms.

Investment Selection

The Equity Income Strategy invests in the common stocks of domestic dividend paying mid cap, large cap, and mega cap companies that we believe are trading below intrinsic value.

Investment ideas are generated from a variety of sources, including:

  • Quantitative stock screening;
  • Stocks that have recently suffered significant share price declines;
  • Investment news;
  • Investment industry publications and newsletters.

For new ideas worthy of further investigation, we will compare the stock’s current valuation metrics against the historical averages, review the company’s financial statements for the past several years for material information that may bear upon its future prospects, review company conference calls, participate in conference calls with analysts to gain industry insight, and meet with management teams to get a better understanding of general business fundamentals.

We typically avoid companies that:

  • Involve products or business models we do not like or understand;
  • Are heavily leveraged or in financial distress;
  • Have high dividend payout ratios (>75%);
  • Have a history of treating outside shareholders poorly;
  • Have a recent history of accounting problems or regulatory scrutiny.

"Our research process assesses the underlying earnings power of a company, employs a proprietary method to identify companies selling below their historic value, and considers current business and market conditions to establish valuation parameters. This process has been employed at Radnor for more than 30 years."

— Elisabeth Schwan, Director of Research

Portfolio Construction

The typical Portfolio typically holds between 30 and 50 stocks, although holdings may be above or below this range if conditions warrant. Most holdings fall within a 2% to 5% range of the equity allocation. Further, we are generally fully invested, with a cash position usually ranging from 3% to 5%, subject to client and market circumstances.

The typical Equity Income portfolio is tax-efficient, with average annual turnover of approximately 10%.

We employ a bottom-up stock picking approach, where consideration is given to achieving a prudent level of portfolio diversification across industry groups, economic sectors, and market capitalizations. New investments are viewed in the context of their effect upon the volatility and the expected risk-adjusted return of the current portfolio. Our goal is a stock portfolio with below average volatility characteristics. The typical portfolio is also constructed to provide an absolute dividend yield greater than the benchmark (Russell 1000 Value).

Sell Discipline

We will reduce a stock position or sell it entirely if:

  • Our original thesis for the investment has been undermined;
  • The stock is selling at an unwarranted premium to our estimate of fair value;
  • We have lost confidence in management;
  • A superior investment alternative becomes available.