Pennsylvania Trust

Equity Income


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

Investment Selection
Portfolio Construction
Sell Discipline


  • Our primary investment objective is to construct a portfolio that will outperform 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 well-diversified portfolio of high quality companies with a proven track record of long term earnings and dividend growth.
  • It’s our belief that the potential for a predictable source of income in dividend paying companies serves not only to reduce portfolio volatility, but also, enhance 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.
  • On a broader level, 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 values, but eventually move back toward their historical norms.

Investment Selection

  • The Equity Income strategy invests in the common stocks of dividend paying mid cap, large cap, and mega cap companies, both domestic and foreign, 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 from a range of sources; and
    • Investment industry input.
  • 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 recent company conference calls, set up 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, among other things:
    • Involve products or business models we do not understand;
    • Are heavily leveraged or in financial distress;
    • Have high payout ratios (>70%);
    • Have a history of poorly treating outside shareholders;
    • Have a recent history of accounting problems; and
    • Are subject of a pending government investigation about a subject material to its business.

Portfolio Construction

  • The Model Portfolio, typically holds between 30 and 40 holdings, though it may contain slightly more or less than this range when, in the investment team’s opinion, conditions warrant. Most holdings fall within the 2.0% to 5.0% range. Further, we are generally fully invested with a cash position ranging from 3% to 5%.
  • 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 geographies. New investments are viewed within context of their effect upon the volatility and expected risk-adjusted return of the current Model Portfolio. The Model Portfolio is constructed to be less volatile with a Beta coefficient ranging historically from .80 to .90 (S&P 500).
  • The Model Portfolio is constructed to provide an absolute dividend yield greater than its benchmark (S&P 500).
  • The holdings in the Model Portfolio are diversified by:
    • Market capitalization;
    • Industry group and economic sector;
    • Primary driver of expected return (e.g., dividend yield, earnings growth, and dividend growth);
    • Implied volatility (below-average beta); and
    • Geographic location (U.S. versus foreign).

Sell Discipline

  • We will reduce or sell entirely a stock in the Model Portfolio when:
    • Our original basis for investment has been undermined;
    • The stock is selling at an unwarranted premium to our determination of the fair value of the company’s underlying assets;
    • We have lost confidence in management’s ability to run the company profitably; and
    • A superior investment alternative becomes available.