dividends prepare for recovery slides - equitycompass

Chris MutascioSenior Managing Director

Tom MulroySenior Portfolio Manager

Jim DeMasi, CFA®Senior Portfolio Manager

Dividends: Preparing for Eventual Recovery

July 2020

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Relative Performance of High-Yielding Dividends

Indices are unmanaged, do not reflect fees and expenses, and are not available for direct investment.Past performance is no guarantee of future results.

Bifurcations can occur within equity markets that create opportunities. We believe we are in the midst of such an occurrence as it relates to high-quality, high-yielding dividend stocks.

High-yielding dividend stocks are trading at/or near 18-year lows relative to the S&P 500 Index. The 25%–30% discount to the broader market is 2x‒3x the historical average.

Concerns that a weakening economy could materially impact companies’ ability to maintain dividend payouts are valid. But, the substantial discounts seem to price in a very draconian outcome.

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Pandemic Driving Risk On/Off Sentiment


The tech-heavy NASDAQ 100 Index outperformed the S&P 500 Low Volatility High Dividend Index by approximately 40% in just four months as investors migrated to a select few companies that benefitted from social distancing or employed business models that enabled growth even during a global economic crisis.

But, what happens when the pandemic is finally under control or a successful treatment regimen is approved? Presumably, corporate earnings should improve and fears of additional dividend cuts subside, which could disproportionately benefit those stocks hit hardest by the economic shutdown.

We saw evidence of this during the initial decrease in COVID-19 cases in the May—June timeframe, only to be reversed during the recent surge in cases as the virus migrated throughout the south and in the west.

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Performance Disparities in Recent Crises


Leading up to and throughout the bottom of the 2008 financial crisis (left chart) both the S&P 500 and the S&P 500 Low Volatility High Dividend indices were down 43%‒47%. It seems as if the market selloff was indiscriminate.

Conversely, during the current pandemic (right chart) the S&P 500 Low Volatility High Dividend Index has significantly underperformed by over 20%. We believe the oil price war and commercial real estate dislocation, concurrent with the global economic shutdown, led to the broader underperformance in the latest downturn.

In light of the significant performance divergence between the crises, high-yielding dividend stocks may provide greater upside potential when the rotation back into more economically-sensitive sectors eventually returns.

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When Could Rotation Occur?


Coming out of the 2008 financial crisis it appears that high-yielding dividend stocks did not break out and start to significantly outperform the broader market until the economic recovery had been firmly established.

The S&P 500 Low Volatility High Dividend Index demonstrated initial signs of compelling outperformance six months after the 2008 fourth quarter low in GDP growth.

Today, consensus GDP estimates are calling for significant contraction in 2Q20, which is expected to be the low point for GDP with current 3Q20 estimates signaling material improvement. If accurate, and if sustainable economic improvement occurs thereafter, then we believe rotation could occur as early as the second half of 2020.

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What Could It Mean for Dividend Stocks?


Once the rotation starts, we believe performance could be substantial. From the financial crisis market low in early March 2009 through the end of that year, the S&P 500 Low Volatility High Dividend Index outperformed the S&P 500 by nearly 22%.

While the economic outlook beyond the initial rebound remains highly uncertain due to the unpredictable nature of the virus, a sustained economic recovery could ignite a lengthy period of outperformance for high-yielding dividend stocks, in our opinion.

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Dividend Team

Christopher M. MutascioSenior Managing Director

Chris joined EquityCompass in May 2018 as a Managing Director and manages the High-Dividend Portfolio. He joined EquityCompass from Stifel, Nicolaus & Company, Incorporated, where his most recent role was Associate Director of Stifel’s U.S. Equity Research department. Prior to his position with Stifel Equity Research, Chris was senior bank analyst with KBW and a director of large cap traditional bank research for Credit Suisse. Previously he spent seven years with Legg Mason, where he wasa managing director and the company’s senior bank analyst. He began his career as a federal bank regulator with the Office of the Comptroller of the Currency, where he worked for six years, rising to the level of national bank examiner. Chris has an M.B.A. from Loyola University Maryland and an undergraduate degree from Gettysburg College.

Thomas P. MulroyExecutive Vice PresidentSenior Portfolio Manager

Tom joined EquityCompass in September 2017 and serves as Executive Vice President and Senior Portfolio Manager with a focus on value and dividend strategies. He has held various senior executive positions with Stifel since he joined the firm in 2005, including operating and policy involvement for capital commitment, equity and fixed income trading, enterprise risk management, and investment research. His most recent position was Co-President and Co-Director of the Institutional Group at Stifel, Nicolaus & Company, Incorporated. Tom served as a member of Stifel Financial Corp. Board of Directors as well as his predecessor firm, LeggMason Wood Walker, Inc. Tom holds a B.S. in Finance from Ithaca College and an M.B.A. in Finance from American University.

James DeMasi, CFASenior Portfolio Manager

Jim joined EquityCompass in July 2019 as a Senior Portfolio Manager for fixed income and co-manages the High-Dividend Portfolio.Prior to joining the portfolio management team, Jim served as the Chief Fixed Income Strategist at Stifel, Nicolaus & Company, Incorporated for 12 years. At Stifel, Jim created investment portfolio and risk management strategies for the firm’s institutional fixed income clients. He published several periodic strategy reports on the fixed income markets, including Bond Market Weekly and Alpha Advisor. Previously, he spent five years at Legg Mason as a fixed income strategist and 13 years at the Federal Deposit Insurance Corporation (FDIC) in bank supervision. His FDIC career included roles as a bank examiner, bond analyst, and seniorcapital markets specialist. Jim has a B.S. in Finance from West Virginia University. He is also a CFA charter holder and member of the Baltimore Security Analyst Society.

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About EquityCompass

At EquityCompass, our mission as an asset management company is to provide investment solutions that address the needs of clients accumulating, protecting, and decumulating wealth. We aim to accomplish these goals with an organization culture that prizes intellectual honesty, open dialogue among colleagues, and a commitment to continually improve ourselves and the investment process.

Extensive Investment Experience

Investment team led by Richard Cripps, CFA – former Managing Director of Portfolio Strategy at Stifel and former Chief Market Strategist and Co-Chairman of the investment committee at Legg Mason Wood Walker

Senior members include Robert Hagstrom, CFA as Chief Investment Officer and Chris Mutascio as Senior Managing Director – both with 20+ years of investment experience

Publishing investment research since 2001

Offering investment portfolios on the Stifel platform since 2006

Research-Driven, Risk-Managed Portfolio Strategies

Incorporates fundamental, technical, and behavioral insights evolving from original research by EquityCompass professionals

Portfolios are designed to maximize expected returns by focusing on stock selection while incorporating rigorous risk management strategies

The investment team collaborates to leverage ideas, research, and expertise in making investment decisions on all strategies

Quantitative

Qualitative

PortfolioManagement

Rigorous empirical testing to identify favorable risk-adjusted investment insights

Experienced qualitative analysis for final investment selection

Focused and disciplined portfolio decision-making

EquityCompass Investment Management, LLC (“EquityCompass”) is a Baltimore-based equity investment management team that provides portfolio strategies with respect to assets over $3.6 billion.1

(1) Total assets combines both Assets Under Management and Assets Under Advisement as of June 30, 2020. Assets Under Management represents the aggregate fair value of all discretionary and non-discretionary assets, including fee paying and non-fee paying portfolios. Assets Under Advisement represent advisory-only assets where the firm provides a model portfolio and does not have trading authority over the assets.

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Important Disclosures

The information contained herein has been prepared from sources believed to be reliable but is not guaranteed and is not a complete summary or statement of all available data nor is it considered an offer to buy or sell any securities referred to herein. Affiliates of EquityCompass may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.

The S&P 500 index is a broad market index that tracks the performance of 500 stocks from major industries of the U.S. economy. Indices are unmanaged, do not include fees and expenses, and it is not possible to invest directly in an index. The S&P 500 Low Volatility High Dividend index measures the performance of the 50 least-volatile high dividend-yielding stocks in the S&P 500. The index is designed to serve as a benchmark for income-seeking investors in the U.S. equity market. The Nasdaq-100® is one of the world’s preeminent large-cap growth indexes. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. Indices are unmanaged, do not include fees and expenses, and it is not possible to invest directly in an index. All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees. Changes in market conditions or a company’s financial condition may impact the company’s ability to continue to pay dividends. Companies may also choose to discontinue dividend payments.

PAST PERFORMANCE CANNOT AND SHOULD NOT BE VIEWED AS AN INDICATOR OF FUTURE PERFORMANCE.

Additional Information Available Upon Request

© 2020 EquityCompass Investment Management, LLC, One South Street, 16th Floor, Baltimore, Maryland 21202. All rights reserved.

EquityCompass Investment Management, LLC1 South Street, 16th Floor

Baltimore, Maryland 21202Hotline: (443) 224-1231

E-mail: [email protected]

dividends prepare for recovery slides - equitycompass

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