Sustainable Dividend Investing –Finding income in a yield starved environment

Mark Painter, CFASenior Portfolio Manager

Overview

The search for yield is becoming increasingly difficult

Understanding and balancing risk is necessary as RISK continually shifts

Opportunities exist outside of “traditional” income asset classes

Focus on fundamental drivers of company performance is essential

A disciplined approach will lead to outperformance of benchmarks

2

Current Asset Class Yields3

INCOME ASSETS

REALESTATE3.78%

CASH.15%

10 YR 2.65%

INV. GRADE3.48%

HIGH YIELD5.82%

INV. GRADE7.19%

SOURCE: BLOOMBERG

MUNI Bonds2.94%

Current yields are as of 4/30/2014 and from the following sources. ETF’s representing VNQ for real estate, JNK for High Yield, MUB for Muni Bonds, LQD for Inv. Grade, 6 mo current CD rate available on Schwab institutional for cash, and 10 yr treasury for bonds

Why Investors use Traditional “Income” Assets

• Low perceived risk

• Low perceived volatility

• Known income stream

• Low perceived correlation with the market

• Understood by the general population

4

Myths about risks

• Low perceived risk Interest Rate Risk?

5

0

2

4

6

8

10

12

14

16

18

5/6/

1980

5/6/

1981

5/6/

1982

5/6/

1983

5/6/

1984

5/6/

1985

5/6/

1986

5/6/

1987

5/6/

1988

5/6/

1989

5/6/

1990

5/6/

1991

5/6/

1992

5/6/

1993

5/6/

1994

5/6/

1995

5/6/

1996

5/6/

1997

5/6/

1998

5/6/

1999

5/6/

2000

5/6/

2001

5/6/

2002

5/6/

2003

5/6/

2004

5/6/

2005

5/6/

2006

5/6/

2007

5/6/

2008

5/6/

2009

5/6/

2010

5/6/

2011

5/6/

2012

5/6/

2013

5/6/

2014

!0 y

r. yi

eld

10 Yr. Treasury Yield

SOURCE: BLOOMBERG

Myths about Volatility

• Low perceived volatility Spread Risk?

6

SOURCE: FRED St. Louis Federal Reserve

Current Spread is 44bps away from all time low set in 2007

Where does that leave us – Equities?

Investors are afraid of the market Volatility drives bad decisions

(buy high – sell low)

• Headline news drives fear and greed• Dividends are less predictable than traditional income assets

7

Components of Shareholder Equity Return Fundamental Underlying Earnings of company

Dividends

Share Buy-Backs

8

0

5

10

15

20

25

30

35

3/1/

1954

12/1

/195

59/

1/19

576/

1/19

593/

1/19

6112

/1/1

962

9/1/

1964

6/1/

1966

3/1/

1968

12/1

/196

99/

1/19

716/

1/19

733/

1/19

7512

/1/1

976

9/1/

1978

6/1/

1980

3/1/

1982

12/1

/198

39/

1/19

856/

1/19

873/

1/19

8912

/1/1

990

9/1/

1992

6/1/

1994

3/1/

1996

12/1

/199

79/

1/19

996/

1/20

013/

1/20

0312

/1/2

004

9/1/

2006

6/1/

2008

3/1/

2010

12/1

/201

19/

1/20

13

Historical S&P 500 P/E Ratio

SPX Index - Price Earnings Ratio (P/E) Average +1 SD -1 SD

Psychological Multiple Expansion and Contraction

SOURCE: BLOOMBERG

Our View: FOCUS ON THE FUNDAMENTALS

From 1930-2011 DIVIDENDS accounted for 50% of total return in S&P 500 – ISI group

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Why stocks pay high yields? – Market Believes Unsustainable

10

TICKER NAMEDIV YLD1 YR AGO DIVIDEND CUT

CMO CAPSTEAD MORTGAG 12.99 √

WIN WINDSTREAM HOLDI 12.08

RRD RR DONNELLEY & S 11.57

CEQP CRESTWOOD EQUITY 11.27 √

APO APOLLO GLOBAL 11.18

CWH COMMONWEALTH REI 11.05 √

FSC FIFTH STREET FIN 10.75

SCCO SOUTHERN COPPER 10.72 √

PSEC PROSPECT CAPITAL 10.71

FGP FERRELLGAS-LP 10.04

BBEP BREITBURN ENERGY 9.91

MMLP MARTIN MIDSTREAM 9.85

SOURCE: BLOOMBERG

What We Learned

Markets Often Take Broad Stroke Views - Mark Down Sectors, Categories and Industries

Market Generalizations Offer Opportunity

Each Company is a Unique Story - Buy Companies, Not Markets

Find the Companies Who can Support, and Grow Dividends

Income Durability through Diversification - Own all Sectors S&P 500 Sectors

Identify companies through AD-STAR that Pay Unusually (Above Market) High Dividends

Generate Consistent Returns on Invested Capital to Support and Grow Dividends

History of Utilizing Capital Efficiently through Shareholder Returns

Record of Consistent Cash Generation

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AD-STAR

Continual Revaluation& AssessmentPortfolio

Valuation(Level 3)

600+ Financial Screens (Level 2)

All Listed Companies

(Level 1)

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Qualitative Overlay

Qualitative Review After Passing AD-STAR: Competitors/Competitive Advantages

Market Potential/Market Share

Product Mix

Business Model

Governance

Risk

13

Company Attributes

14

SLG High Dividend and Value Performance

15

All statistics calculated from Stanley Laman Group, Ltd. High Dividend and Value Composite as of 03/31/2014 (the “Composite”). You should not consider this performance data as a prediction or an indication of future. The Composite represents fully discretionary advisory accounts that are managed in accordance with the SLG Dividend and Value investment strategy. The performance results above are prepared in accordance with Global Investment Performance Standards (“GIPS”). The returns of the accounts presented were calculated on a total return basis and include all dividends and interest and realized and unrealized gains and losses. All returns are presented after the deduction of a hypothetical 1.00% fee. Inception date of the Composite was February 1, 2010.

■ Beta: .91 (inception)■ Alpha: 3.03% (inception)■ R2: .87 ■ Turnover: 37.45% (3yr avg.)