In 2024, Hilton Capital’s Dividend & Yield Strategy (DIVYS) showcased its strength and effectiveness, successfully maneuvering through a complex and dynamic market environment marked by swiftly evolving narratives. The year was characterized by a striking contrast: on one hand, the continued supremacy of the “Magnificent 7” technology behemoths, and on the other, a growing shift towards wider market involvement. Amidst these opposing currents, the Investment Committee’s methodology demonstrated its prowess in seizing opportunities while effectively managing risks. This strategic approach enabled the portfolio to deliver strong 2024 performance, even as traditional dividend-yielding indices struggled to gain traction in the prevailing market conditions.
Throughout the year, DIVYS exhibited remarkable adaptability and insight, utilizing its diverse approach to achieve compelling risk-adjusted returns. The portfolio’s success stemmed from the Investment Committee’s adept macroeconomic trend analysis, astute identification of thematic opportunities in AI, GLP-1 therapeutics, and private credit markets, and meticulous bottom-up research to uncover unique compounders. Looking towards 2025, we expect a volatile market environment driven by two key factors: the Federal Reserve’s (the Fed) “Higher for Longer” policy and potential slowdown in AI-related Capital expenditures that have supported the market’s soft-landing narrative. While broad indicators suggest strong earnings growth potential for large-cap equities, several counterforces introduce uncertainty. Employment trends, housing affordability issues, and potential tariff exposure may impact consumer spending and economic growth. Additionally, a potential deceleration in AI-driven CapEx could moderate the tech sector’s outsized influence. These factors necessitate heightened vigilance. As such, the Investment Committee stands ready to navigate a market that requires increased alertness and flexibility admit shifting economic dynamics.
As illustrated in Figure 1, while all equity sectors posted gains in 2024 (excluding Materials), the performance landscape exhibited notable disparities. A confluence of factors, including volatile interest rates, continued AI fervor, and robust government expenditures, propelled growth sectors to outpace their defensive value counterparts.
In a remarkable display of market dynamism, previously underperforming sectors in the third quarter rebounded strongly in the fourth quarter of 2024, highlighting the market’s swift rotational capacity. Our team noted the Fed’s renewed focus on inflation control, despite potential employment challenges. However, we anticipate a quick pivot to accommodative policy if economic conditions worsen, effectively providing a ‘Fed Put’. With 10-Year Treasury rates exceeding 4.75% and market consensus projecting minimal rate cuts for 2025, we view this outlook as overly hawkish given moderating inflation and potential employment softness. Consequently, we maintain a positive outlook for equity markets in FY 2025, albeit with heightened volatility expectations.
During Q4, the Hilton Capital Investment Committee adeptly managed portfolio risk by implementing strategic sector and single name allocation adjustments in response to market conditions. Information Technology exposure was increased to 29% from 26.5% while both Financials and Industrials exposures were adjusted +/- 2% at 16.9% (v. 14.9% in Q3) and 9.3% (v. 11.3% in Q3), respectively. Additionally, Consumer Discretionary increased to 10.2% from 7.6% and Communication Services was boosted to 8.2% compared to 6.8% in the prior quarter. With the notable exception of Consumer Staples, which was reduced to a 5% weight (v. 7.3% in 3Q), all other sectors were within +/- 1.5% weights compared to the third quarter.
Performance: The Hilton Capital Dividend & Yield Strategy demonstrated remarkable resilience in the fourth quarter of 2024, with the Composite achieving a modest return of +0.18% gross (+0.06% net). While this performance may appear relatively flat, it stands in stark contrast to the benchmark's* decline of 0.89%, resulting in an outperformance of approximately 107 basis points for the quarter. Even more noteworthy was the full-year performance, which yielded an exceptional +22.27% gross (+21.65% net) return. This robust result significantly outpaced the benchmark* by an impressive margin of approximately 467 basis points, underscoring the strategy's effectiveness in capitalizing on market opportunities throughout the year.
During the quarter, the Investment Committee strategically enhanced the strategy’s exposure to AI by initiating positions in select companies, thereby strengthening the strategy’s thematic alignment. The Investment Committee made several key moves, establishing new positions in META Platforms (META) and Cisco (CSCO), while increasing existing holdings in NetApp (NTAP), IBM Corp. (IBM), Corning Inc. (GLW), and Oracle Corp. (ORCL). These carefully curated additions represent industry leaders within the burgeoning AI datacenter ecosystem. The team’s decision to execute these moves was driven by two primary factors: attractive valuations and accretive yields. By focusing on these aspects, we aimed to provide investors with compelling risk-return opportunities while maintaining the strategy’s strategic focus on high-quality, dividend-yielding stocks poised to benefit from the ongoing AI revolution. To finance these acquisitions, the strategy reallocated capital by reducing or fully divesting positions in several holdings. Notably, we trimmed or exited stakes in Public Storage (PSA), Republic Services (RSG), ExxonMobil (XOM), and LyondellBasell (LYB). This decision was primarily driven by the fact that both XOM and RSG were trading at valuations approaching decade-highs, while simultaneously offering lower earnings growth potential and less attractive returns on invested capital compared to the newly added positions. As for LYB, the Investment Committee reevaluated two key company-specific developments: the lack of material divestiture announcements for its European assets and continued weak U.S. Institute for Supply Management figures.
As the quarter progressed, the strategy divested its holdings in Pepsi Co (PEP), Target Corp. (TGT), and Carrier Global Corp (CARR) due to distinct challenges facing each company. PEP's sale was prompted by growing concerns over consumer health trends, while TGT's divestment stemmed from intensifying competition in the retail sector. The decision to exit CARR was influenced by the potential rollback of the Inflation Reduction Act, which could impact the company’s business outlook. Consequently, the Investment Committee strategically redeployed the sale proceeds by bolstering its position in Fidelity's Consumer Discretionary ETF (FDIS) and Procter & Gamble (PG), while establishing new holdings in Xylem, Inc. (XYL), Booz Allen Hamilton (BAH), and Truist Financial Corp. (TFC). These moves aimed to capitalize on market weakness while strategically increasing exposure to financials and consumer discretionary sectors post-U.S. election. The addition of XYL reflects the Investment Committee’s long-standing admiration for what we believe is the company's high-quality water treatment portfolio and its margin-accretive, recurring software business for water quality data. XYL's exceptional management, strong market position in water management, and attractive dividend growth potential make it a compelling long-term holding for the strategy.
In the latter part of the quarter, the strategy divested its positions in Seagate Technologies (STX), Cullen/Frost Bankers (CFR), and BWXT Technologies (BWXT). The decision to exit STX was primarily driven by growing concerns over the accelerating obsolescence of Hard-Disk-Drives (HDDs), which posed a significant risk to the company's core business. While the Investment Committee maintains a positive outlook on both CFR and BWXT, the emergence of more attractive risk-adjusted opportunities elsewhere in the market necessitated their sale. These moves underscore our commitment to dynamic portfolio management and optimal capital allocation in pursuit of superior risk-adjusted returns.
As we look ahead into 2025, the DIVYS strategy is positioned to capitalize on the evolving economic landscape, which is increasingly characterized by expanding growth prospects. The strategy’s robust performance for 2024 validates the efficacy of our sector allocation approach in the current economic climate. Over recent quarters, the Investment Committee has meticulously adjusted the strategy’s sector weighting, orchestrating a nuanced transition from a predominately defensive stance to a slightly more pro-cyclical orientation. This calibrated shift enabled the strategy to harness emerging megatrends while maintaining risk-adjusted returns. The Investment Committee’s measured approach to sector reallocation and individual security analysis exemplifies Hilton Capital’s’s commitment to capturing growth opportunities while prudently managing risk in a dynamic market environment. The Investment Committee extends their gratitude to the firm’s clients for their continued trust. As we navigate the evolving landscape, our team remains committed to their proven strategies and is confident in their ability to deliver strong relative performance in the years ahead.
Important Disclosures:
Hilton Capital Management, LLC (“HCM”) is a Registered Investment Advisor with the US Securities Exchange Commission. The firm only transacts business in states where it is properly notice-filed or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.
The views expressed in this commentary are subject to change based on market and other conditions. The document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Sources include Bloomberg and INDATA (our portfolio accounting and performance system). There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
All investing involves risks including the possible loss of capital. Asset allocation and diversification does not ensure a profit or protect against loss. Please note that out- performance does not necessarily represent positive total returns for a period. There is no assurance that any investment strategy will be successful. All investments carry a certain degree of risk. Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited.
Additional Important Disclosures may be found in the HCM Form ADV Part 2A, which can be found at https://adviserinfo.sec.gov/firm/summary/116357.