In shaping a high-yield portfolio to gain maximum results, I like to use what I call a “cut and build” strategy. This means I trim positions that have rallied up to levels where the yields on those holdings are substantially lower than is worth taking further risk. Simultaneously, I rotate into undiscovered or unappreciated high-yield assets that will attract new fund flows, thereby pushing those stock prices higher.
This dynamic aspect of managing high-yield assets means money never sits still in high yield.
Earlier in the month, we’ve seen a rotation by market participants into more economically sensitive sectors. The S&P decoupled from bad European headlines and is now focused on the stronger-than-expected U.S. economic reports. Even with the euro trading at a 16-month low against the dollar (almost hit a 17-month low), U.S. multinationals are steaming higher. They’re the easiest and most trusted way to play the emerging markets, as well as the nascent domestic economic recovery.
Along those lines, I opted to exit positions in Chilean asset manager A.F.P. Providia (NYSE:PVD) and Terra Nitrogen (NYSE:TNH) after both traded up to levels that I deemed to have stiff resistance in relation to the dividend yields they were paying out. Essentially, it’s my “cut and build” strategy at work.
In doing so, I booked profits of 44% and 18%, respectively. By staying agile and culling positions that have rallied, I can stay ahead of the S&P and the competition in the high-yield sector. And after adding Mesabi Trust (NYSE:MSB), my total holdings number 33 — with plenty of room to add further positions in the weeks ahead.
My goal is to own no more that 40 positions at any given time, with no more than 3% of invested capital in any one position. I’m also aiming to own a portfolio between aggressive and conservative high-yield assets that carries a blended composite yield of 10%.
Having taken a highly conservative approach in mid-2011, given the risk of European-induced financial contagion, I was willing to live with less income and more stable principal. I did that through the purchase of utilities, consumer staples and tax-free municipal bonds in lieu of other sectors that were enduring higher levels of volatility.
In retrospect, that proved to be the right decision because I was able to accumulate steady gains while receiving consistent dividends. And those positions will continue to reward me going forward.
But now that the market has taken some focus off Europe, it’s time to raise the blended yield to my stated 10% target. And adding Mesabi Trust and its 14.4% projected yield is a strong start.