quarterly-update
 
 
  
  • Solid operating earnings drove dividend growth to 5.7% over the past two years 
  • Companies anticipate operating earnings will continue to grow at a rate of 7%

Although the U.S. economic environment remained stable, the second quarter was dominated by continued global economic worries and the controversial Brexit vote. While the quarter had positive equity returns and lessened volatility, fears regarding interest rates (will they increase too fast or not at all?), energy prices (will oil prices rebound sharply or hit new lows?), and consumer spending (strong or weak) all played into a “defensive” market. Our dividend stocks had a strong quarter despite such concerns.

Our dividend and earnings growth expectations are highlighted in Figure 1. We note that business conditions in the U.S. are reasonably stable and improving, albeit slowly. Uncertainties surrounding Brexit may keep interest rates lower for longer, but the strong U.S. labor market may offset some of that. A low-rate environment may benefit some dividend sectors such as REITs and utilities, while hampering others such as banks. Additionally, a strong dollar and weakened global conditions are factors to monitor with our multinational blue-chip companies. Overall, as fundamental company researchers, we will need to be nimble to adjust to changing market and economic conditions. We have brought in our expectations of return over the next twelve months to a range of 5-6%, driven by the dividend yield and a portion of the dividend growth.

An additional metric to watch is how the spread of the dividend yield looks relative to the 10-year Treasury. In Figure 2, we can see the spreads are attractive and at the highest levels in more than three years. This is important, as Treasuries have rallied on Brexit fears. Although dividend stocks have done well too, we believe there is still room for growth in the event that Treasury yields rise, which we think is likely, especially near the end of the year. In addition, our Dividend and Income research team is focused on identifying and investing in companies that can grow their dividends to drive total return and mitigate the potential downside from rising rates. As investors worldwide search for yield and income, we believe our strategy is well focused to help bring these cash flows to our clients.

 

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 on 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, 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.

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. 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 and unrated securities of similar credit quality, commonly known as “junk bonds” or “high-yield securities,” may be subject to increased interest, credit, and liquidity risks.

Investments in emerging markets 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 markets 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 Standard and 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 U.S. Treasury 10 year note is a debt obligation issued by the United States government that matures in 10 years. A 10 year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

The MSCI World Index captures large and mid cap representation across 23 Developed Markets countries.

The Barclays U.S. Corporate High-Yield Index covers the U.S. dollar denominated, non-investment grade, fixed rate, taxable corporate bond market and includes securities with ratings by Moody’s, Fitch and S&P of Ba1/BB+/BB+ or below.
 
The Barclays Emerging Markets USD Aggregate Bond Index is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate U.S. dollar denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers.

The Bloomberg CFETS RMB Index is an index replica of the trade weighted CFETS RMB Index, which tracks the yuan against 13 currencies.

The U.S. Dollar Index is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.

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