Quarterly Update

David A. Shapiro, Senior Portfolio Manager, Senior Equity Analyst | Jan. 2022

Equity Income: Bright Prospects Remain, Volatility May Increase

Generating income from companies with resilient, growing free cash flow

Positioning for economic growth, inflation and interest rates, all elevated but moderating

Looking at valuation gaps and yield spreads as ongoing tailwinds relative to the broader market

As we enter 2022 we reflect on a historic year for dividend stocks, with total returns of 32.2%, well above the broader market and even edging out growth*. Can this continue? And what is the outlook for dividend stocks?

Our outlook for the year is for the expansion to continue, but with some key differences. Ongoing economic growth, still above trend, but moderating. Inflation, still elevated, but moderating over time. Supply disruptions, a similar story, ongoing, but improving into the back half. We expect modest interest rate increases from levels that remain near historical lows.

We see our holdings managing through all of these issues, with some benefiting outright from inflationary pressures and rate hikes, and others offsetting them to different degrees by executing against their inflationary playbooks. Many of them offset higher costs by implementing pricing, taking advantage of their scale, their brand or other competitive advantage. In general, we see business conditions benefiting the sales, earnings and cash flow growth of dividend stocks.

For us, the inflationary, rising-rate playbook is similar to that of the management of our holdings. Our research team focuses on pricing power as a key offset to inflation, and we heighten its prioritization. Similarly, to offset the impact of rising interest rates, we emphasize dividend growth over yield level. And we continue to overweight real estate, a more direct beneficiary of inflation than other income sectors.

We do anticipate the potential for higher volatility in coming quarters as we get later in the cycle. But we also see several relative valuation metrics supportive of a continued tailwind to income stocks. Valuation spreads for our value-like dividend stocks vs. growth remain historically wide and ripe for mean reversion. Similarly, yield spreads remain elevated. And dividend stocks provide attractive income in a world where it is harder to find.

Key Points

Generating income from companies with resilient, growing free cash flow

Positioning for economic growth, inflation and interest rates, all elevated but moderating

Looking at valuation gaps and yield spreads as ongoing tailwinds relative to the broader market

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Important Disclosures

Important Information

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 re-flect 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 ex-penses.

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 securi-ties. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a high-er-quality rating.

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 height-ened 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 munici-pal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain inves-tors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in be-low-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 guar-antee 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.

This material is available to advisory and sub-advised clients, as well as financial professionals working with City National Rochdale, a registered investment advisor and a wholly-owned subsidiary of City National Bank. City National Bank provides investment man-agement services through its sub-advisory relationship with City National Rochdale.

Index Definitions

S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria that the index includes.

Bloomberg Barclays US Aggregate Bond Index (LBUSTRUU): The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

GT2 Govt, GT3 Govt, GT5 Govt, GT10 Govt, GT30 Govt: US Government Treasury Yields

DXY Index: The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.’s most significant trading partners.

Dow Jones U.S. Select Dividend Index DJDVP: The Dow Jones U.S. Select Dividend Index looks to target 100 dividend-paying stocks screened for factors that include the dividend growth rate, the dividend payout ratio, and the trading volume. The components are then weighted by the dividend yield.

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