The final days of the June quarter were marked by a decline that averaged 5.0% in U.S. markets as they reacted to the results of the historic United Kingdom referendum to exit the European Union. The surprise Brexit vote sparked concerns of future economic and political uncertainty in the U.K. The negative market action lasted two days with “bond proxy” assets such as dividend stocks resilient relative to the broader market. Historically, companies with persistent dividend growth have provided excess returns during periods of market volatility. Despite the global turmoil, the brief correction was followed by an immediate “risk on” rally recovering most of the decline by quarter end.

Dividend Growers vs. Non-Payers Performance During Months When VIX Increased
VIX Monthly Increase Average Out/Under Performance of Dividend Growers
Greater than 40% 1.7%
20-40% 0.3%
10-20% 1.1%
Less than 10% 0.0%
Average (across all months when VIX increased) 0.7%

Despite concerns of sluggish GDP growth and stretched equity valuations, investors took advantage of the volatility to buy equities on sale. Two market declines this year (February 11th and June 24/27th) resulted in rapid rebounds. However, given current valuations (S&P 500 index P/E 18) the risk–reward dynamic may result in the market remaining range-bound until we near the U.S. presidential election.

The thirty-five year decline in U.S. Treasury bond yields has resulted in a historic low yield environment with the ten-year Treasury yielding 1.46% versus the S&P 500 Index yield of 2.1% (see chart below). An even wider spread exists between bonds and more defensive stocks in the Telecom, Utilities and Staple sectors which are yielding 3.0% on average. With Brexit providing yet another reason for the Federal Reserve to postpone a 2016 rate hike, yield seekers could be motivated to continue to invest in dividend stocks versus bonds.


We believe a strong fundamental stock selection process is critical in selecting companies that demonstrate the ability to provide consistent dividend growth with a reasonable dividend payout ratio. Currently forty-four companies in the S&P 500 Index have dividend payout ratios exceeding 100% which is the highest level in ten years. Aside from the REITS which are required to pay out the majority of their taxable income, companies that pay out more in dividends than they generate in earnings could face dividend cuts going forward if earnings were to decline. Historically, dividend stocks that have an average payout ratio of 35.0% exhibited the strongest performance over the last 20 years.


The strongest S&P 500 Index sectors during the quarter were Energy and Telecom versus the weakest performance in the Technology and Consumer Discretionary sectors. The High Dividend Equity portfolio is overweight in Energy and Staples while underweight Financials and Healthcare. Several stocks we purchased were AT&T, Whirlpool and Intel versus sales of PNC, Lincoln Financial and Gilead. Financials were the hardest hit over investor concern that a U.S. rate hike is off the table for 2016 which we believe does not bode well for ongoing bank profitability. Going forward we see added value in the Energy sector as earnings improve with stabilization of the price of oil and the Technology sector which demonstrates consistently above average earnings growth. We are positive on select Utility and Staple stocks but cautious on a valuation basis in the short term.

Past performance is not indicative of future results. This is not a recommendation to buy or sell a particular security.

The opinions expressed are those of the Clark Capital Management Group Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There are no guarantee of the future performance of any Clark Capital Investments portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. For educational use only. This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. The Investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance does not guarantee future results.

The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities.

The Dow Jones Industrial Average is a stock market index that shows how 30 large publicly owned companies based in the U.S. have traded during a standard trading session in the stock market.

The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performers of developed markets outside the U.S. and Canada.

The MSCI Emerging Markets Index is a freefloat-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

Barclays Capital U.S. Government/Credit Bond Index measures the performance of U.S. dollar denominated U.S. Treasuries, government-related & investment grade U.S. Corporate securities that have a remaining maturity of the greater than one year.

Index returns include the reinvestment of income and dividends. The returns for these unmanaged indexes do not include any transaction costs, management fees or other costs. It is not possible to make an investment directly in any index.

Morningstar is the largest independent research organization serving more than 5.2 million individual investors, 210,000 Financial Advisors, and 1,700 institutional clients around the world.

For each separate account with at least a three-year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a separate account’s monthly performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of separate accounts in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. The Overall Morningstar Rating for a separate account is derived from a weighted average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics.

© 2013 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. Not every client’s account will have these exact characteristics. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment.

Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security, sector or industry. There is no assurance that any securities, sectors or industries discussed herein will be included in an account’s portfolio. Asset allocation will vary and the samples shown may not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices and which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk. The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities. The Barclays Capital U.S. Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S. The Barclays Capital Aggregate Bond Index is an intermediate term index.

The volatility (beta) of a client’s portfolio may be greater or less than its respective benchmark. It is not possible to invest in these indices.

Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services and fees can be found in its Form ADV which is available upon request.