Warren Buffett famously issued two rules for successful investing. Rule one: Don’t lose any money. Rule two: Don’t forget the first rule. This fund’s conservative portfolio reflects this timeless approach and has rewarded investors seeking capital appreciation and income. 

The S&P 500’s gains over the past two years might suggest that all is right with the world. The index racked up a gain of more than 26 percent in 2009 and an admirable return of 15 percent last year. This strong performance has driven up valuations and resulted in a slew of high-flying Internet initial public offerings reminiscent of the dot-come boom. But a brewing sovereign debt crisis in Europe and gridlock in Washington have injected a dose of reality to the party. In these times, many investors seek downside protection from a back-to-basics fund such as Nicholas Equity Income (NSEIX)

“We aren’t willing to pay high prices or speculate on Internet stocks,” Albert “Ab” Nicholas told Louis Rukeyser’s Mutual Funds. “We will not be the big winner in up markets but we will certainly hold better in down markets.”

This fund’s conservatism paid off during 2008, when the market punished funds of all stripes. Nicholas Equity Income declined by 23.6 percent, compared to a 37 percent loss for the S&P 500—a performance that put the fund in the top 2 percent of the Morningstar mid-Cap Value category. The fund came roaring back in 2009 with a gain of 34.5 percent and went on to return 22 percent last year, though this performance landed it squarely in the middle of the pack for its category.

This recounting of the fund’s performance may lead some to dismiss Nicholas Equity Income as a pedestrian offering with the occasional moments of brilliance. But this fund shines in the long haul; Nicholas Equity Income ranks in the top 2 percent of its category for the trailing five years.

The fund invests in dividend-paying value stocks that are often overlooked by the Street. Management adopts a buy-and-hold strategy, reflected by the fund’s low turnover ratio of 26.4 percent. About three-quarters of the portfolio is dedicated to mid-, small-, and micro-cap companies, many of which have yet to garnet the interest of Wall Street analysts.

Rocky Mountain Chocolate Factory (NSDQ: RMCF) is a Colorado-based confectioner and gourmet chocolate maker that primarily operates on a franchise model. In addition to more than 300 franchises in the US, Canada and the United Arab Emirates, the company has also expanded into the frozen yogurt business with its Aspen leaf yogurt (ALY) chain. Rocky Mountain aims to open 15 to 20 ALY stores in the next six to eight months.

Rocky Mountain Chocolate Factory (NSDQ: RMCF) is a Colorado-based confectioner and gourmet chocolate maker that primarily operates on a franchise model. In addition to more than 300 franchises in the US, Canada and the United Arab Emirates, the company has also expanded into the frozen yogurt business with its Aspen Leaf Yogurt (ALY) business line. Rocky Mountain aims to open 15 to 20 ALY stores in the next six to eight months.

The company and its franchisees continue to grapple with slackening consumer spending and a tight credit environment. The company’s first-quarter net income declined to $919,659 from $931,601 the previous year due to higher transportation costs and expenses related to expanding its chocolate and yogurt business lines. But revenue rose 13.4 percent year over year to 8.6 million and the stock pays a dividend yield of 4.15 percent.

Nicholas Equity Income’s preference for small- and mid-cap names doesn’t preclude management from opportunistically purchasing shares of blue-chip dividend payers such as AT&T (NYSE: T). management also believes that the market is overly pessimistic about the losses that pharmaceutical giant Pfizer (NYSE: PFE) will face when the patent on its blockbuster heart medication Lipitor expires next year. With Pfizer shares trading at a forward price-to-earnings ratio of 8.7, Nicholas believes the stock is too cheap to pass up, despite the potential headwinds caused by the looming patent expiration.

Nicholas anticipates the US economy will experience modest growth for the next few years and that success in the markets will depend on savvy stock picking. But the market’s tumultuous recent history has also reinforced the importance of collecting a dividend from reliable companies.

“A lot of people were burned in the economic and stock market debacle,” Nicholas said. “Our approach appeals to those investors who are a bit nervous about the markets.”

Nicholas Equity Income’s SEC yield came in at about 3.3 percent as of mid-July. But Nicholas said that the presence of several master limited partnerships—which are not reflected in the portfolio’s yield for accounting reasons—brings the fund’s actual yield to more than 4 percent.

With a stable of solid dividend-paying stocks in the portfolio, Nicholas Equity Income is a hassle-free fund that will reward conservative investors.