St. James INVESTMENT A D V ISO R SHIGH DIVIDENDYIELD PORTFOLIO
PORTFOLIO object ivesINVESTMENT philosophyWe employ an absolute return mindset to long-only value investing. Dividends are an important component used in evaluating the attractiveness of a company. Dividends provide a reflection of the activity of a company, its management and the value of its shares.We seek to identify good business models with an attractive current yield, a growing income stream over time and the opportunity for capital appreciation.S T . J AME S I NVE S T M E N T A D V I SOR S1The St. James High Dividend Yield Portfolio takes a total return approach to dividend investing, seeking attractive current income and capital appreciation through an actively managed portfolio of dividend-paying stocks. The typical portfolio will have approximately 30 companies. The High Dividend Yield value-oriented approach invests primarily in securities with above-average dividend yields and trading at reasonable discounts from assessment of intrinsic value.
VALUE INVESTING Value investing is the art of buying assets for significantly less than the true “intrinsic” or business value to a rationale purchaser. “An investment operaon is one which, upon thorough analysis, promises safety of principal and an adequate return. Operaons not meeng these requirements are speculave.” -Benjamin Graham, Intelligent InvestorInvesting requires research and analysis to calculate an estimate of fair value for an asset. “What is invesng if not the act of seeking value at least sufficiently to jusfy the amount paid? Consciously paying more for a stock than its calculated value – in the hope that it can be sold at a sll higher price – should be labeled speculaon, which is neither wrong, immoral, nor in our view, financially faening.” -Warren Buffe, 1992 Berkshire Hathaway shareholder leer S T . J AME S I NVE S T M E N T A D V I SOR S2
S T . J AME S I NVE S T M E N T A D V I SOR S3WHY WE BELIEVE, DIVIDENDS ARE IMPORTANTOver the long term, the return from dividends has been a significant contributor to the total returns produced by equity securities.There is an abundance of empirical evidence which suggeststhat portfolios consisting of higher dividend yielding securitiescan produce returns that are attractive relative to lower-yielding portfolios and to overall stock market returns over long measurement periods.Stocks with high and apparent sustainable dividend yields that are competitive with high quality bond yields may be more resistant to a decline in price than lower-yielding securities because the stock is in effect “yield supported”. The reinvestment of dividends during stock market declines has also been shown to generally lessen the time necessary to recoup portfolio losses.Dividends provide a reflection of the quality of a company, its management, and the value of its shares.The ability to pay cash dividends is a positive factor in assessingthe underlying health of a company and the quality of itsearnings. This is particularly pertinent in light of the complexityof corporate accounting and numerous recent examples of“earnings management”, including occasionally fraudulent earnings manipulation.
References for Why We Believe Dividends are Important: Triumph of the Opmists:Princeton University Press 2002; Dividends and the Three Dwarfs: Editor’s Corner, Robert Arno, Financial Analysts Journal 2003; Contrarian Investment Strategies: The Next Generaon, David Dreman 1998; The Future for Investors, Why the Triedand the True Triumph over the Bold and the New: Jeremy J. Siegel 2005; Morningstar: Josh Peters The critical importance of dividends, as well as dividend growth, is easily observed in historic market returns. In the 100-year period from 1912 through 2012, the S&P 500 Index returned an average of 9.6% a year. This is right in line with the 9%-10% figure of con-ventional wisdom. Lesser known is the fact that dividend income accounts for 46% of this total return, translating to an average yield of 4.4%. Dividend growth, which averaged 4.3% a year, explains the bulk of the remaining total return. Without dividends, a dollar investedin the S&P in 1912 became $152 by year-end 2012. With dividends andthe impact of dividend reinvestment, that same dollar grew to $9,465.S T . J AME S I NVE S T M E N T A D V I SOR S4
BUY A BUSINESS, NOT A STOCKIf you had to purchase a business and hold it for ten years, what would it look like?BUSINESS TENETS:Is the business simple and understandable?Does it have a consistent operating history?Does it have favorable long-term prospects?Is the company’s stock cheap? Is there a margin of safety? “There is nothing esoteric about value invesng. It is simply the process of determining the value underlying a security and then buying it at a considerable discount from that value.” -Seth Klarman, Margin of SafetyS T . J AME S I NVE S T M E N T A D V I SOR S5
STOCK SELECTION, CRITERIAThink about investing as the purchase of a business.Watch the business, not the stock!Utilize a sufficiently long time frame.If you had to hold a purchased business for ten years, what would it look like?As great ideas are scarce, be willing to hold cash.Paent OpportunismAcknowledge volatility does not equal risk.Price is what one pays but value is what one gets.S T . J AME S I NVE S T M E N T A D V I SOR S6
CASHWhen in doubt, hold cash.Relative performance oriented investors typically choose to be fully invested regardless of value in order to not fall behind their benchmarks.Patience and discipline are necessary in the absence of obvious bargains. “Holding cash is a way of safely doing nothing unl a compelling investment opportunity arises. Cash offers the virtues of posive yield, complete safety of principal, and full and instant liquidity.” - Seth Klarman “While we don’t like having excess cash, we like doing dumb things even less.” - Warren BuffeS T . J AME S I NVE S T M E N T A D V I SOR S7
QUALIFICATIONSELL DISCIPLINEPATIENCEFUNDAMENTAL ANALYSIS &DETERMINING FAIR VALUESTAGES STAGES QUALIFICATIONQUALIFICATIONSTAGES QUALIFICATIONQUALIFICATIONSELL DISCIPLINESELL DISCIPLINESTAGES SELL DISCIPLINESELL DISCIPLINEPATIENCEPATIENCESTAGES PATIENCEPATIENCEFUNDAMENTAL ANALYSIS &FUNDAMENTAL ANALYSIS &STAGES FUNDAMENTAL ANALYSIS &FUNDAMENTAL ANALYSIS &DETERMINING FAIR VALUEDETERMINING FAIR VALUESTAGES DETERMINING FAIR VALUEDETERMINING FAIR VALUEINVESTMENT PROCESS S T . J AME S I NVE S T M E N T A D V I SOR S8
INVESTMENT PROCESS STAGE 1 QUALIFICATIONInvestment UniverseIdenfy OpportuniesDividends > Market AverageMarket Cap > $5 BillionScreen for companies withnear-term challenges offeringlong-term valueFollowedOpportunityS T . J AME S I NVE S T M E N T A D V I SOR S9
STAGE 2 INVESTMENT PROCESS FUNDAMENTAL ANALYSIS & DETERMINING FAIR VALUESTAGE 2 “Sum of the Parts” AnalysisAracve BusinessStrong ManagementCapable Operators?Shareholder Oriented?Proper Incenves?Graham’s“Margin of Safety”DefinionSubstutes?Exisng Competors?New Competors?Pricing Power?Power of Suppliers?DividendIs the Dividend Safe?Will the Dividend Grow?What is the total return potenal?Discounted Cash Flow AnalysisBusiness FinancialsSolid Balance Sheets?Strong Free Cash Flow?S T . J AME S I NVE S T M E N T A D V I SOR S10
STAGE 3INVESTMENT PROCESS PATIENCES T . J AME S I NVE S T M E N T A D V I SOR S11Assess and Monitor Fair Value – We seek to initiate positionsat a significant discount to our determination of fair value, focusing on absolute valuation vs. relative valuation and ignoring benchmarks. Risk Control –We define “risk” as the probability of the permanent loss of capital—not price volatility. We believein concentrating our portfolio in the most attractive investment ideas, which can cause short-term price volatility. Although concentrated by industry standards, a portfolio of approximately 30 holdings permits for ample diversification while allowing our best ideas to have the greatest positive impact on performance. It is important to note that no one issue accounts for more than 5% of the portfolio assets on the cost side; and no one industry group accounts for more than 20% of the portfolio's value.Cash –Importantly, our patient approach to portfolio construction often necessitates we hold cash. In our mind, this is not ideal, as our goal is a fully-invested portfolio of world-class investments. However, we adhere to the time tested philosophy, as taught by Benjamin Graham, of buying fractional shares of businesses at discounts to their intrinsic values. As a result, if there are no cheap stocks, we wait.
STAGE 4 INVESTMENT PROCESS SELL DISCIPLINEPrice Appreciation –The price reaches our appraisal and no margin of safety remains. Superior Risk / Reward Elsewhere –We can improve our risk/return profile substantially. For example,we can replace a business selling at 90% of its worth with an equally attractive company trading at 50% of its value. Eroding Fundamentals –The future earnings power of the company becomes severelyimpaired by competitive threats, balance sheet deterioration,or poor capital allocation.Loss of Confidence in Management –We no longer believe management can build shareholdervalue and efforts to find new corporate leadership would be unsuccessful or too costly.Dividend –Reduced substantially or cut.S T . J AME S I NVE S T M E N T A D V I SOR S12
DIFFERENTIATORSST. JAMES HIGH DIVIDEND YIELD Absolute Return Mindset – Absolute return investors buy stocks that are out of favor because they are cheap. Relative return investors buy stocks that are popular, which means that they are already fully priced. Further, trying to keep pace with the market in all environments promotes poor decisions and increases the chances of making mistakes. As one cannot spend relative performance, absolute returns are the only returns that matter.Independent Research – Original research is at the heart of each invest-ment, forming a well-founded thesis that looks at least three years ahead.Because we have independently built the case for our ideas, we have theconfidence to invest in out-of-favor areas and to hold our ground whenshort-term sentiment runs the other way. In our experience, periods of great pessimism often generate the best investment bargains.Long-Term Orientation – Years of investing have taught us that investorperceptions of an equity security fluctuate much more widely than under-lying fundamentals. As a result, we are habitually focused on the long-term and continually ask ourselves: “based on what we know today, how would we invest an all-cash portfolio if we could not trade for three to five years?” This exercise forces us to re-evaluate our portfolio holdings within an ever-changing market environment, and to reaffirm our rationale for long-term appreciation.Strict Price Discipline – A low entry price for each security position is a key driver of future returns. First, a low stock price incorporates low investor expectations that often serve as a buffer against the risk of decline. Second, investing at a low valuation creates greater potential forcapital appreciation. S T . J AME S I NVE S T M E N T A D V I SOR S13
You should carefully consider the portfolio’s investment objectives, risks, charges and St. James INVESTMENT ADVISORSSt. James Investment Advisors is an independent, fee-only, U.S. Securitiesand Exchange Commission registered investment advisory firm, provid-ing customized portfolio management services to individuals and their financial advisors.Our investment methodology blends a combination of fundamental analysis, discipline and patience with the goal of creating long-term returns based on the time-proven principles of value investing.We are professional portfolio managers Committed to Value Investing and our sole focus as a firm is to manage private investment accounts for individuals and their financial advisors throughout the United States.S T . J AME S I NVE S T M E N T A D V I SOR S14
St. James INVESTMENT A D V ISO R S