Quarterly Update

Apr. 2018

David J. Abella, Managing Director, Senior Portfolio Manager | Apr. 2018

Rising Rates Don’t Have to Hurt High Dividend Stocks

Many factors affect high dividend stocks

Rates remain low by historical standards

Quality companies perform well long term

City National Rochdale’s High Dividend Income strategy focuses on stocks with attractive yields, raising the question: How can these stocks perform in a rising interest rate environment, especially after a difficult first quarter?

Our strategy relies on lengthy historical analysis showing that there has not been a strong correlation between the long-term returns of high dividend stocks and periods of rising interest rates. Many other factors affect these stocks, including the growth rates of income and cash flows at the companies, expectations about the operational states of the underlying businesses, the condition of the equity markets, and the strength and growth rate of the overall economy. In some cases, higher rates have corresponded with a negative price performance of high dividend stocks; in other cases, price performance was positive as rates rose. Our data showed no sustainable pattern or high correlation.

In past periods, we have experienced short-term volatility in our dividend stocks when expectations for higher rates were suddenly heightened. Our view is that much of the weakness in dividend stocks in the first quarter was due to outsized expectations regarding higher rates. Although the Fed is expected to increase the fed funds rate three more times this year, with the 10-year Treasury rate being range-bound, it’s important to remember that interest rates, both short and long, are currently quite low by historical standards.

We conclude that rates are not the main driver of performance for income stocks over the long term if other significant factors are at play, such as solid cash-flow growth. At the same time, we are aware that rising rates (or heightened expectations of increases) can result in short-term price volatility, and our experience tells us that continued caution is in order in the near term. Our focus will remain on identifying undervalued, high-quality companies with solid prospects for dividend growth over time under most conceivable economic environments.

Key Points

Many factors affect high dividend stocks

Rates remain low by historical standards

Quality companies perform well long term

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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 risks include, but are not limited to, stock market, manager, or investment style. 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. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy, and market risk. Investors in MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Income Tax).

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. 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. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

Investments in emerging market bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging market bonds can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk. Past performance is no guarantee of future performance.

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