Another three months, another refresh of the Smart Alpha Equity Income portfolio. There were plenty of trades, 19 out of 20 positions turned over. That’s par for the course and to be expected: The model reaches for yield as far as feasible without straying into the junk-income territory, and that requires that we not allow metrics that lead to purchase to become stale with age.

First Things First: Turnover

I know it’s respectable and expected to consider portfolio turnover. On one level, we do want to hold positions long enough for our ideas to be able to pan out, and many do take time. But many are much more worried about transaction costs.

I trade at FolioInvesting.com, where I pay a modest annual fee and trade for free, yes free, so long as I trade within the firm’s 11 AM (ET) or 2 (PM) “window.” If I were a hard-core trader, that might irritate me. But I’m not. I’m a fundamental investor. I don’t play the “tape” and agonize over whether my trades close at 11 AM, 9:53 AM, 3:14 PM etc. Trading desks aside, that sort of thing plays well in movies but in real life, oh please!

It’s much more important to me that I feel comfortable getting out of a position, not when some guru with no skin in the game thinks I should but based on when the models that got me into a stock tell me it’s time to exit. Holding stocks that should be sold is not a good idea. We had to do it when we paid an arm and a leg in commissions. But now, payment of big commissions is strictly voluntary. Nobody has to do it if they don’t want to do it, and I don’t want to do it.

Recognition of taxable capital gains can also be a concern. I trade this model in an I.R.A. so for me at this time, this topic is off the table. But even with trades in taxable accounts, I prefer to book a gain and pay the tax, rather than not have the gain, or worse, have it turn into a loss because I held even though fundamentals told me that was the wrong thing to do.

So yes, I’m trading 19 out of 20 positions; Guess? Inc. (GES) is the lone holdover. But considering the non-junk yields available in the marketplace today, the 4.4% I’m getting here strikes me as well worthwhile, especially since I only refresh the model once every 13 weeks.

The entire portfolio can be seen, and followed, for free on Portfolio123 (to see the stocks, you’ll need to register, but there is no fee or credit card requirement to “subscribe” to a free Smart alpha model such as this one). But I’ll provide a sample here to show you the kinds of ideas this model pursues pursuant to its goal of using market action in addition to fundamentals to gauge dividend security.

Table 1 lists the five highest-yielding stocks presently in the portfolio:

Table 1

Be warned, with interest rates as low as they are, you aren’t going to get yields like these without having to deal with some sort of corporate baggage. We know that going in. The model is designed to keep the baggage manageable.