Quarterly Update

David J. Abella, Managing Director, Senior Portfolio Manager | Apr. 2021

Dividend Stocks: Solid 2021 Start Likely To Continue

Focus on income from companies with opportunities for dividend growth

Continue to look for new opportunities if growth accelerates

Solid yields and compounded growth can drive longer-run returns, with help from potential equity appreciation

As we look back at the first quarter of 2021, we notice a strong start to the market, including value and dividend names. The questions become: Can this pace continue and what is our outlook for the remainder of 2021? First, we feel optimistic that our expected total return outlook for the next rolling 12-month period can remain in the 6%-10% range. Given the results of our companies after the first quarter earnings calls, we have moved our expected dividend growth up to a range of 3%-6% from 2%-5%. In addition, given the potential strength in the economy later in 2021, coupled with a broadening base of sector recovery, we may look to further increase our dividend growth factor (see chart). After last year’s first quarter, our concern was that companies might reduce or eliminate their dividends, so shifting to a growth expectation is a dramatic and positive pivot.

Given a first-quarter uptick in longer rates coupled with some worry about further increases, how does the valuation of key income sectors look relative to Treasuries? In the second chart, we see that the spread is still attractive when looked at over the past 10 years. The spread had peaked after the first quarter of 2020, with historical lows in the 10-year Treasury and distressed equity prices. Overall, rates remain historically low, especially given the potential strength in the recovery. So we are encouraged by the solid rate spread coupled with an increased expectation of dividend growth and economic recovery.

We continue to focus on companies with attractive and stable dividends, with an increased emphasis on growth. Our view is that attractive yields of dividend stocks can drive our expected return and we seek to benefit from companies that can prosper in an improving economic recovery.

Key Points

Focus on income from companies with opportunities for dividend growth

Continue to look for new opportunities if growth accelerates

Solid yields and compounded growth can drive longer-run returns, with help from potential equity appreciation

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

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.

Concentrating assets in a particular industry, sector of the economy, or markets may increase volatility because the investment will be more susceptible to the impact of market, economic, regulatory, and other factors affecting that industry or sector compared with a more broadly diversified asset allocation. Private investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information.

Alternative investments are speculative, entail substantial risks, offer limited or no liquidity, and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying and lengthy lockup provisions. Please see the Offering Memorandum for more complete information regarding the Fund’s investment objectives, risks, fees, and other expenses.

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.

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.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Alternative investments are speculative, entail substantial risks, offer limited or no liquidity and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying, and lengthy lockup provisions.

CNR is free from any political affiliation and does not support any political party or group over another.

Index Definitions

The Treasury index is an index based on recent auctions of U.S. Treasury bills and is commonly used as a benchmark when determining interest rates, such as mortgage rates.

The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

The Palmer Square CLO Debt Index (“CLO Debt Index”) is a rules-based observable pricing and total return index for collateralized loan obligation (“CLO”) debt for sale in the United States, original rated A, BBB, or BB or equivalent.

The S&P/LSTA U.S. Leveraged Loan 100 Index is designed to reflect the performance of the largest facilities in the leveraged loan market.

The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.

The Bloomberg Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market.

Bloomberg Barclays 1-3 Year Government/Credit Index (LGC3truu) is an unmanaged index considered representative of short-term U.S. corporate and government bonds with maturities of 1-3 years.

The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.

Bloomberg Barclays U.S. Corporate High Yield Index (barhiyd) is an unmanaged index that is comprised of issues that meet the following criteria: at least $150 million par value outstanding, maximum credit rating of Ba1 (including defaulted issues), and at least 1 year to maturity.

Bloomberg Barclays High Yield Municipal Bond Index (barhiym) is an unmanaged index considered representative of non-investment-grade bonds.

Vanguard Consumer Staples ETF seeks to track the performance of a benchmark index that measures the investment return of consumer staples stocks.

The iShares U.S. Utilities ETF seeks to track the investment results of an index composed of U.S. equities in the utilities sector.

Vanguard Real Estate ETF seeks to track the investment performance of the MSCI US Investable Market Real Estate 25/50 Index.

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