Three months ago, we made a big pivot from focusing on pure trading opportunities to a more balanced total return strategy. The decision was part pragmatism and part philosophy.

It’s working. We’ve made about 3.4% across the portfolio in those three months, which is a robust return if our expectations are aligned with reality. I’ll talk about that shortly, but for now I want to focus on the pragmatism and the philosophy behind the pivot.

On one hand, it’s now clear that Wall Street is not in the mood to instantaneously embrace companies that for one reason or another get shut out of the rallies. While the market will always eventually resolve unfair discount situations, the process can easily take 3-6 months if not longer.

That’s too long for most of us to hang around when the growth end of the market goes up and up. It strains credibility to buy cheap stocks and hold onto them for what could hypothetically become forever waiting for justice.

And like the watched pot that never boils, checking in on those stocks doesn’t make them rise any faster. If anything, it’s counterproductive because it forces us to keep asking why they haven’t joined the market mainstream yet.

Even a little of that becomes a drag on conviction. You start doubting your original thesis, rechecking your assumptions, wondering again and again why the market doesn’t come around to your way of thinking.

Meanwhile, those growth stocks beckon. You’re missing out. I get it. If you find value stocks boring, let’s figure out how to transfer your subscription to GameChangers, which is all about growth.

But I don’t find value stocks boring. They have a role to play. And that’s where the philosophy comes in. We were treating value stocks like temporarily embarrassed growth stocks when they’re really income stocks.

The power of these companies was never their ability to race alongside Big Tech or other areas of the market that are expanding so fast that investors need to buy early and strap in. Value Authority companies have always been about steady cash flow and distributing that money back to shareholders as a reward for patience.

It’s always been about the dividends adding up in the long term. In other words, these stocks are not substitutes for growth stocks. That’s crazy. These stocks are substitutes for bonds and other interest-paying investments. That kind of investing requires a different pace and a different frame of mind.

And on that basis, the portfolio is now constituted to provide a compelling substitute. Long-term Treasury debt might pay 4.4% a year right now with minimal risk. Our stocks are currently paying an average yield closer to 5.2%, which gives us almost a full percentage point lead right there.

That’s where it starts. We take on a little more risk that our dividends will get cut during our holding period and we’ll earn less. And of course we’re on the hook if we need to sell the stock at a lower price when it’s time to get our capital back.

With Treasury bonds, you get your principal back with interest. But that guarantee doesn’t apply unless you buy the bonds yourself . . . no fund or pooled product will automatically return every cent of capital at the end of the holding period.

What that means for us is that as long as we’re squeezing reasonable income out of our holdings, there’s no reason to even look at the exit. The “holding period” never ends in that scenario, which means the market price is only a matter of hypothetical interest on any given day.

We love it when that potential sell price goes up and we can calculate how big a return we’d get if we wanted to sell on that day. That’s been our approach in the past. It’s all about pure capital appreciation in that scenario with a little dividend income on the side.

But when you want these stocks for the dividends, you want to stretch the holding period as long as you can to capture as many of those dividends as you can. Think about how good it would feel to get close to 14% a year out of TWO, for example, for the rest of your life . . . without ever having to even think about a sell price.

That’s only our most extreme example right now. People park in Treasury debt or CDs for decades at a time without worrying too much about the exit. We won’t hang around our stocks quite that long, but a little of that mindset is worth cultivating.

Now of course we aren’t going to settle for 5% a year for the rest of our lives. While Treasury debt provides fixed returns when you hold to maturity (no risk equals no upside along with no downside), stocks like ours are both more volatile and more vibrant.

The tangible value of these companies can increase like any other if the management team makes the right moves over time. And the price investors will pay rises and falls with the market’s mood. It’s all a cycle.

Right now these stocks are out of favor and the prices are low. That gives us the opportunity to lock in higher-than-normal yields for extended periods . . . if we’re willing to show a little conviction and swallow a little volatility on the price in the meantime.

We’ll do a little more rotating up on yield in the coming weeks. TNL (more here in a moment), PEP and HON are great companies and good stocks, but we bought them with the exit in mind and not so much the dividends. Granted, those dividends are going up, but not at a rate that will thrill anyone any time soon.

WEC and KMT are a slightly better proposition since we locked in yields roughly comparable to what we’d get on Treasury debt. But we want to beat bonds on that front, not simply match them and then earn our outperformance on the exit.

Make A Trade

I’m moving all of these stocks into our “tactical” or Trading bucket to reflect this basic truth. We want to hold names like this for an exit. We just aren’t going to rack up a compelling score on their yields for years if not decades to come.

As they earn that exit, we’ll lock in higher yields on their replacements. I’d like to work our way up to an aggregate yield of 6% or even a little bit higher. That’s a pretty good base . . . a healthy yield premium above anything you’ll find in the Treasury market and it adds up over time.

Let’s start the process by cashing TNL. We’re up close to 24% here but are only earning $0.50 per share every three months. Maybe if management boosts the payout, we’ll be back.

And let’s roll the proceeds into Energy Transfer (ET). Pipelines flowing oil and gas from the wells across 44 states to refineries or export hubs. Volume is up. Exports are up. Joint ventures in fuel retail (Sunoco) and LNG compression add sizzle.

I don’t need to tell you that energy prices ebb and flow but right now in what we could call a “light slump,” ET is earning about $1.33 per share annually, which translates to a relatively cheap 14X if market conditions stay roughly where they are.

This is not about global energy demand. It isn’t about China. ET gets paid simply for pushing gas to U.S. power plants to keep the lights on. If you believe in utilities driving the AI revolution, that narrative will drive this stock.

Wall Street collectively thinks ET will earn about $1.65 per share next year, taking that forward valuation down to about a 11.5X multiple . . . half what you’ll get on the S&P 500 right now and no question, a “value” play compared to the market as a whole.

If ET traded at fair value, this would be a $38 stock and we would be cheering. One day it might happen. For now, however, we’re locking in a healthy yield.

Pipeline payouts are volatile. After a bad quarter, ET might pay only $0.15 per share. After a great one, the dividend might stack up closer to $0.50. Across the past decade, shareholders have gotten $0.38 per share on average, which means roughly an 8% yield over time.

Lock that in and we might earn our starting stake back in under a decade without having to sell a single share. And even then, the dividends keep coming. ET hasn’t missed a payment since it went public in 2006.

Actually, do you know what? ET went public at $21 back in 2006. People who bought on opening day might superficially look like chumps here at $19 . . . until you realize that they’ve captured $28.50 in dividends and still own their shares.

That’s what I’ve been talking about through this update. If you’d parked that cash in a 20-year Treasury bond, you would’ve earned about 4.7% a year and you’re close to getting your principal back in full.

But on ET, you would’ve banked 7.2% a year. We’re getting in at a discount, which means our odds of beating bonds are even better than that now. Buy ET below $19.25. Be patient. Accumulate on the dips. This will be a $21 stock again.

Our Other Yield Names

Similar logic applies with TWO and TCPC, which have seen some selling from traders who don’t really understand the long-term mortgage cycle. Yes, it’s been a rough season in the housing market. But rates are going down, right?

Our entry on both of these names was under the assumption that rates were roughly as bad as it gets. That cycle is turning, one way or another. But in that “worst case” scenario, TWO will be able to make $0.45 payments per share on a current cash flow basis and while TCPC has been more erratic, its payouts have never dropped below $0.30.

That means we’re banking at least 12% a year on these stocks as long as we hold them. We might hold them for a few years or dump them if it looks like the dividend flow is in danger. For now, 12% a year is pretty good. As with those long-term ET shareholders, it’s even worth accepting a little principal erosion over time . . . we’re earning our cash back now with interest, so the pressure on the exit is a lot lower.

ICMB follows the same argument but the dividends have already covered our paper losses so I probably need to spend less time convincing anyone how fast a yield like this can compensate for an out-of-favor stock. Even if the world stays like this and never gets better or worse, ICMB can probably manage $0.12 per share every three months.

I don’t think the world is getting worse for companies like this. The financing environment is getting more attractive in terms of the spreads that ICMB uses to make money for shareholders. As long as management remains diligent about its choices, the cash will keep flowing.

Odds are good that more cash will flow as the environment improves. But we aren’t counting on that. That’s a bonus. Here, $0.12 per share every quarter gives us 15% a year in current income. And that proposition is as true now as it is when we bought in.

Keep accumulating our yield plays while they’re weak. You might even lock in a higher yield than I did on my initial recommendation.

And as for our other names, like I said, they’re more about the exit than the little checks along the way. We’ll keep nudging them out the door when we can rotate into something better. Trading TNL for ET is only the latest step in that process.