On the Radar

City National Rochdale, | Mar. 15, 2021

FAQs on the Markets and Economy

What is CNR’s outlook for dividend stocks?

In our view, dividend and income equities offer some of the greatest remaining value for investors. Looking out over the next few years, we see continued recovery in our dividend stocks and have a high level of confidence in our 6-10% expected annual returns assumption.

Building blocks of our expected return include, most importantly, the dividend yield, followed by growth in the yield, and additionally, some continued equity appreciation.

A post-COVID environment helped along with massive fiscal and monetary stimulus should provide a solid tailwind for dividend equities. In addition, low interest rates should continue to attract income investors.

The main factor we are watching out for is concerns over higher interest rates driven by some combination of strong economic growth and worries about inflation. Accordingly, we have been pivoting from a position of defensiveness to one of increasing dividend growth.

Dividend growth in our invested companies is expected to increase to 6% in 2022 after improvement to 3.5% in 2021 (chart). This type of strong dividend growth will help fuel our expected total returns while helping to insulate us from potentially higher interest rates (or even fears of higher rates).

Payrolls are rebounding following the winter lull. The past two months have been on an uptrend, reversing the negative path in payroll growth of the second half of last year (chart).

The reopening of regional economies, especially in California, contributed heavily to the gains in January and February. What makes the February report even more impressive is this increase happened during some severe weather in most of the country. Imagine what the improvement would have been if the weather was better. The number of people who could not work last month due to weather was 897,000, about 600,000 more than usual.

The unemployment rate fell to 6.2% from 6.3%. It has experienced a sharp decline from last April’s peak of 14.2%.

The Treasury Department has more than $1 trillion on deposit at the Fed, which is more than twice their normal balance. The amount is high because the government borrowed money for pandemic relief but has not spent it all.

The Treasury now plans to dramatically reduce the size of the account as the government spends money on additional relief and other expenditures.

As the money moves from government accounts to individual accounts, it will put downward pressure on short-term interest rates, which are already at a very low level.

The Fed has a couple of monetary tools up its sleeve that will help prevent interest rates from falling below zero, such as offering higher interest rates on excess bank reserves.

Short rates going below zero poses a problem for money market funds, a problem the Fed surely will want to avoid.

Equity markets have consolidated recently amid concerns that rising bond yields may begin to weigh on stock returns.

How equity markets react during periods of rising interest rates has depended heavily on why interest rates are rising and the state of the economy, with inflation being a key factor. Rising rates during periods of high inflation in particular have generally been corralled with lower stock returns.

Today, higher rates are being driven in large part by an improving growth outlook that should also support corporate profits. At the same time, inflation, while normalizing, remains low, and we expect a continuation of the deflationary forces that existed prior to the pandemic to keep price pressures ahead more gradual than feared.

The S&P 500 has historically done well in this type of environment, although higher volatility is likely in coming months (see table).

For equity investors, it’s important to remember that rising interest rates are starting from very low levels. In fact, despite recent increases, the current 10-year Treasury yield is still below its 60-year pre-pandemic low.

At some point, higher borrowing costs will become an increasing burden for business, consumers and governments, but at current or even higher levels, we believe interest rates remain low enough to support a robust economic recovery and higher equity returns.

Stay Informed.

Get our Insight delivered straight to your inbox.

Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These include, but are not limited to, stock market, manager, or investment style risks. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability.

There are inherent risks with fixed income investing. These may include, but are not limited to, interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond risks. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed income securities and during periods when prevailing interest rates are low or negative.

Investing involves risk, including the loss of principal.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

Past performance is no guarantee of future performance.

This material is available to advisory and sub-advised clients of City National Rochdale, LLC, a Registered Investment Advisor and a wholly-owned subsidiary of City National Bank.

Index Definitions

S&P 500 Index (S&P500) is a stock market index that tracks the 500 most widely held stocks on the New York Stock Exchange or NASDAQ. It seeks to represent the entire stock market by reflecting the risk and return of all large-cap companies.

Put our insights to work for you.

If you have a client with more than $1 million in investable assets and want to find out about the benefits of our intelligently personalized portfolio management, speak with an investment consultant near you today.

If you’re a high-net-worth client who’s interested in adding an experienced investment manager to your financial team, learn more about working with us here.