Quarterly Update

Oct. 2018

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

Strong Economy Continues to Drive Dividend Growth

Current yield and dividend growth drive our strategy

Rising dividends mitigate effect of higher rates

Our holdings have strong dividend growth potential

While City National Rochdale’s High Dividend Income strategy focuses on stocks with attractive yields, a key driver for us currently is future growth of these dividends.

We believe longer-term returns in this strategy are mostly driven by current yield from dividends and steady-state growth in dividends. Our companies pay their dividends out of operating cash flows, which are driven by revenues and margins. In a strong economy, the companies we focus on can grow their dividends at a faster rate.

As the U.S. economy continues to hum along, the companies we hold have been able to increase their dividends near the high end of our preferred range of 4-8%. The actual year-over-year growth number was 7.2%. Analysts currently project annual earnings growth of 11% for our stocks over the next two years, meaning that our estimate of 4-7% dividend growth during that time is comfortably within the range of expected earnings (see first chart). These cash flow streams enable us to project one-year forward returns of 6-8% for our holdings. While markets can be volatile, we have very high confidence in our estimates of aggregate yield and the growth of our companies’ cash flows.

In addition, as the projected earnings growth rate of our companies is greater than the one-year price appreciation, we feel the value of our companies is accruing. In other words, our performance, past and future, has not been driven by P/E expansion and we do not factor P/E expansion into our expected return calculations. For example, looking at the consumer staples valuation vs. the S&P (see second chart) shows how the staples sector valuation appears to discount substantial headwinds versus the broader market.

Our view is that strong cash flows, coupled with solid growth rates, should continue to drive the attractive total returns the City National Rochdale Dividend Strategy has achieved in the past. The key building block remains identifying undervalued, high-quality companies with solid prospects for future dividend growth under most conceivable economic environments.

Key Points

Current yield and dividend growth drive our strategy

Rising dividends mitigate effect of higher rates

Our holdings have strong dividend growth potential

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 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.

Index Definitions

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 S&P/LSTA Leveraged Loan 100 Index (LL100) is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans, as determined by criteria.

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.

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

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.