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Loss elimination

Applying that rule to the Bearbull Income Portfolio, where is trouble most likely to be hiding? To answer that, we need a handle on the portfolio’s overall rating. That provides both an indication of whether the whole portfolio might be expensive relative to its market – the FTSE All-Share index – and a point of comparison for the individual holdings.

So think of the portfolio as a single company. Then it would be rated at almost 13 times 2019’s forecast earnings (a bit higher than the All-Share) and offer a 5.8 per cent dividend yield (about 1.3 times the All-Share’s). So there is a fat yield on offer, but not much excess earnings to cover the payout (average cover is about 1.5 times). Meanwhile, this theoretical company would make abnormally wide profit margins (24 per cent) and an acceptable return on equity (14 per cent), both of which are levered by quite a lot of debt in relation to equity.

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