Quarterly Update

May 2020

David J. Abella, Managing Director, Senior Portfolio Manager | May 2020

Dividend Stocks: Black Swan Volatility – Focus on Dividend

Focus on income from companies with steady cash flows in this environment

Remain defensive and look for new opportunities as we move through this cycle

Let solid yields and compounded growth help drive longer-run returns

As we look back at the first quarter of 2020, we see a true black swan negative shock to the economic system. The economic pain was different than prior economic downturns in that it came out of nowhere and inflicted quick and painful damage, especially in the month of March. It was also unique in that it had outsize effects on industries that have often been safe havens in past downturns. In past recessions, dividend stocks had defensive characteristics, but that was not true in the first quarter. Suddenly, the prediction became that stocks in the S&P 500 could cut their dividends by as much as 25%, and dividend stocks were not havens.

As the dust settles, the City National Rochdale dividend research team is focused on owning stocks that can maintain their dividends through the downturn. This would include being in steady cash flow businesses that have much of their revenue tied to “essential services.” In addition, strong balance sheets with reasonable payout levels are important. While maintaining the dividends in our holdings has always been one of our mantras, in this environment it is of highest importance. We needed to shift some of our holdings, much of this turnover having happened in the first quarter. In the end, we feel having a solid portfolio yield that is as steady as possible will be the factor that can generate positive returns over time. With interest rates so low (both short and long) and likely to remain that way for a prolonged amount of time, we do feel investors will be attracted to solid dividend names – provided the dividend remains.

Given the current economic scenario, we are focused on maintaining our yield. We are looking to pick up opportunities as they may present. Later in the recovery, we will look to increase dividend growth opportunities.

So what does the opportunity look like? In the graph, we see spreads to Treasuries of three main equity income assets: consumer staples, utilities and REITs. As shown, all three sectors are trading at the highest spread to Treasury level in the past 10 years. The income opportunity is there. The key is researching names that can maintain that advantage and to focus on those names.

Our view is that these attractive yields can help drive a solid return over time, especially as the dust settles and the economy starts to improve (with Federal Reserve and fiscal help).

Key Points

Focus on income from companies with steady cash flows in this environment

Remain defensive and look for new opportunities as we move through this cycle

Let solid yields and compounded growth help drive longer-run returns

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Important Disclosures

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.

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

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. Index Definitions

The Standard & Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

The Bloomberg Barclays U.S. High Yield Index is an unmanaged index considered representative of non-investment-grade bonds.

The Bloomberg Barclays U.S. Corporate Index 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.

The Bloomberg Barclays Municipal Bond Total Return Index is a total return performance benchmark for municipal bonds that are backed by insurers with Aaa/AAA ratings and have maturities of at least one year.

The JP Morgan High Yield Index is designed to deliver high level of income from a portfolio of below investment grade securities. Indices are unmanaged and one cannot invest directly in an index.

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