CIS Model Portfolio for Income
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Investments We Currently Utilize:
Our strategy is to merge our successful risk management strategy with the income needs of investors. Listed below are the types of investments we use. We may or may not use the specific investments in your portfolio. There are many factors for this including timing, value, yield and risk. This is an overview of the types of securities we believe have the best chance for success.

Background:
To the right is a comparison of current yields of some investments. Income investors need to know what the range of current yields are and this sets the stage for a better understanding of the challenges they face.

No investment is without risk. The higher yields are theoretically compensation for the additional risk. If an investor wants income with no risks, other than inflation and bank failure risk, then they should stick with bank CDs and stop reading right here.

If you have read this far, I will assume you have rejected the prospects of depending on low yielding banks CDs.

At Cornerstone we have reviewed various income options and have evaluated the potential risks. We believe that with the right risk managements and asset allocation, an investor can enjoy higher yields while not exposing themselves to undue risks.

We are not eliminating risk. The income investor needs to be more focused on the cash flow than the principal, since the principal will fluctuate. If you do not want to see your principal fluctuate, then bank CDs are for you.

Income Stocks
Bonds are normally the first stop for the income investor. But certain stocks fulfill the requirements of rising income and low interest rate sensitivity. Bonds can’t do this.

(All yields quoted are estimates and are from Morningstar and Bond Trader Pro. They represent investments within the asset class referenced that fit into our requirements. There will be securities in each asset class with higher or lower yields.)

Utilities - These are economically sensitive, and have some interest rate sensitivity. Historically, they have been used as sources of rising dividend income.Current yields range from 2.00% - 5.50%

Drug Companies - With the aging population and the globalization of healthcare and consumer goods, drug company earnings are more stable and dividends more reliable. This is another good source of rising income. Current yields range from 2.00% - 6.50%

Consumer Goods - Even with a slowing economy, people still need the basics and with growing consumerism in the emerging nations many companies are finding new markets in which to sell their goods. This stabilizes earnings and solidifies dividends. Consumer goods have been a good source of rising dividends. Current yields range from 2.00% - 6.00%

Natural Resource Companies/Oil Companies - Hard Assets are one of the big winners of the Urbanization that is sweeping the Globe. The emerging markets are consuming natural resources at rates much faster than the developed world. This has the potential to ignite inflation here while they drive prices higher. Although volatile, and have dividends that can fluctuate, these companies have the potential to outperform and raise dividends faster than the average stock. Current yields range from 2.00% - 4.50%

Banks - What are banks doing on our list? None are domestic banks. As economies recover, they can be some of the first beneficiaries. Earnings can be volatile and so dividends may also vary. Potential for good long term income growth.Current yields range from 2.00% - 4.50%

Emerging Market Stocks/Bonds - The fastest growing areas in the world are in the Emerging Markets. Lead by China, they are separating themselves from the developed economies by having little debt and higher growth rates. Volatility and long term growth are the main stories here. Earnings will be volatile, potentially leading to some good dividend increases. Focus is on needed growth for future income. Current yields range from 0.00% - 5.00%Aggressive Income - Royalty Trusts and MLPs can be good sources of high income. But they can also be depleting assets. They need to be traded and watched carefully. The yields are high for a reason. These are high risk.
Current yields range from 5.00% - 10.50%

Bonds:
The strategy on bonds is simple, ladder them out about 3 years and as the first year bonds come due, buy a 3 year bond. In this way, an investor is able to follow interest rates up as they rise. Current rates are very low, so they need to be used in combination with other asset classes for the overall portfolio to have a higher current yield.

Corporate Bonds
Strategy: Ladder 1 - 3 years, highest quality only.Ratings and maturity have a lot to do with pricing and yield. The coupon does not tell you how much you will get. The Yield to Maturity is what the investor receives in yield. Corporate bonds have an added risk of default. Looking for only the highest quality is important.

We look for bonds that are priced “wrong” for their ratings and maturity. For instance, the XYZ bond might have the same rating and maturity date as ABC bond, but is priced much lower, giving it a higher YTM. The questions is, what is wrong with it? Is it worth the risk? The yield to maturity alerts us to pricing that might be out of the ordinary. It could indicate a good buy or a problem bond. Just looking for the highest yield to maturity is not a good strategy. Current yields to maturity range from .10% - 2.20%

Muni BondsStrategy:
Ladder 1 - 3 years, avoid certain states.Municipal bonds have a variety of types of bonds and risks. We primarily look for General Obligation bonds, due to their lower risk, but other bonds such as pre-refunded or certain revenue bonds could be appropriate for our purposes. Insured bonds may not be a safe haven because of the questionable finances of the insurers.

Our strategy is the same as with Corporates, to be patient and look for mis-priced bonds. Muni bonds also have the risk of default, so care is needed to not just go for the highest YTM.
Current yields to maturity range from .10% - 1.75%

Treasuries/TIPs Strategy: Ladder 1 - 3 years.
Because of the efficiency and liquidity of the Treasury market, there no chance of finding mis-priced bonds. Because of their low current yields, Treasuries are used for their safety more than their yield. But a laddered portfolio will allow us to follow rates as they go higher, and eventually, we believe yields on Treasuries will be attractive.

TIPs (Treasury Inflation Protection Securities) are the preferred type of Treasury because they offer a “bonus” on the yield based on the inflation rate. Since inflation is one of the key enemies of bonds, getting based on the inflation rate dampens some of the risk. Current yields to maturity range from .10% - 2.00%

Junk Bonds - Muni/Corp Strategy: Small amounts only.
Low rated bonds can have very attractive yields. But they are low rated for a reason, they have plenty of risk of default. We are not opposed to using low rated bonds, but they have to be done in very small amounts as to not increase the risk of the portfolio.

Mutual Funds: (Share classes will impact yield*)
Because of the high turnover within the portfolio, short term bonds are well suited for the mutual fund structure. Advantages they offer are professional management and diversification. The yields of the funds we utilize range from a low of 1.50% to a high of 3.50% according to Morningstar. As always, the higher the yield, the more risk the fund is taking.

Duration and credit quality of the underlying portfolio may impact the volatility of mutual funds. Generally lower yielding funds may have much lower volatility. So while some may have higher yields, they come with higher risks.

ETFs - This is another efficient way to invest in short term bonds. They are easily tracked and highly liquid. The varieties of ETFs today allow us to focus on certain sectors we prefer.

QUINT-ESSENTIAL STRATEGY

PORTFOLIO ALLOCATION CHOICE'S

PORTFOLIO CONSTRUCTION

MODEL FOR INCOME

ECONOMIC CYCLES

INVESTMENT PRINCIPLES

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