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  • 1

    Sam StovallChief Equity Strategist, S&P Capital IQ

    March 19, 2014

    INVESTMENT OUTLOOK:Dont Dump Those Dividends!

    This report is for information purposes and should not be considered a solicitation to buy or sell any security. Neither S&P Capital IQ nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without written permission. Copyright 2014 by Standard & Poors Financial Services LLC. Redistribution, reproduction and/or photocopying in whole or in part is prohibited without written permission. All rights reserved. STANDARD & POORS, S&P, S&P 500, STARS and S&P CAPITAL IQ are trademarks of Standard & Poors Financial Services LLC. All required disclosures and analyst certification appear on pages 31-37 of this presentation.

    2 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    CORRECTION: Due, But Maybe Not on Time

    Number of Months Between S&P 500 Declines of >10% Since WWII

    Source: S&P Capital IQ. Indexes are unmanaged, statistical composites and it is not possible to invest directly in an index. The returns shown do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back tested performance to be lower than the performance shown. Returns exclude dividends. Past performance is no guarantee of future results. Red=Bear Markets, Green=Corrections.

  • 2

    3 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    BEWARE: Four-Year Cycle Low

    Four-Year Cycle Lows: S&P 500 Declines Ending in Mid-Term Election Years

    Source: S&P Capital IQ. Indexes are unmanaged, statistical composites and it is not possible to invest directly in an index. The returns shown do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back tested performance to be lower than the performance shown. Returns exclude dividends. Past performance is no guarantee of future results.

    4 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    PRESIDENTIAL CYCLE: S&P 500 Price Returns by QuarterS&P 500 Average Quarterly % Price Changes and Frequencies of Advance

    During the 16-Quarter Presidential Cycle (12/31/45-3/14/14)

    Source: S&P Capital IQ. Indexes are unmanaged, statistical composites and it is not possible to invest directly in an index. The returns shown do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back tested performance to be lower than the performance shown. Returns exclude dividends. Past performance is no indication of future results.

    Year of

    Pres.

    Cycle Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year

    Year 1 (0.4) 2.6 1.1 3.7 7.6 50% 56% 61% 78% 59%

    Year 2 1.2 (2.5) (0.3) 7.0 5.3 47% 47% 59% 82% 59%

    Year 3 7.0 5.0 1.0 2.9 16.1 88% 76% 59% 71% 88%

    Year 4 1.2 2.3 0.4 1.7 6.1 59% 65% 53% 76% 76%

    All Years 2.2 1.8 0.6 3.8 8.8 61% 61% 58% 77% 71%

    (Frequency of Price Gains)

    Batting Averages

    (w/o dividends reinvested)

    Average S&P 500 % Changes

  • 3

    5 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    PRESIDENTIAL CYCLE: Russell 2000 Returns by QuarterS&P 500 Average Quarterly % Price Changes and Frequencies of Advance

    During the 16-Quarter Presidential Cycle (12/31/78-3/14/14)

    Source: S&P Capital IQ, Russell. Indexes are unmanaged, statistical composites and it is not possible to invest directly in an index. The returns shown do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back tested performance to be lower than the performance shown. Returns exclude dividends. Past performance is no indication of future results.

    Year of

    Pres.

    Cycle Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year

    Year 1 1.1 7.8 2.0 5.6 16.1 56% 100% 67% 78% 89%

    Year 2 4.2 (3.5) (6.6) 9.3 2.2 63% 25% 50% 88% 50%

    Year 3 9.8 7.9 0.2 2.0 20.0 78% 67% 56% 67% 67%

    Year 4 2.6 1.3 3.2 0.3 7.8 67% 56% 56% 56% 67%

    All Years 4.5 3.6 (0.1) 4.2 11.8 66% 63% 57% 71% 69%

    Avg. Russell 2000 % Changes Batting Averages

    (w/o dividends reinvested) (Frequency of Price Gains)

    6 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    POTENTIAL TRIGGERS: Likely Headwinds

    A Boxer is Rarely Felled by the Punch He Expects.

    Source: S&P Capital IQ.

    Peaking of S&P 500 EPS & Profit Margins

    Continued Dysfunction in Washington

    The End of QE3 (Fed Tapering)

    Emerging Market Slowdown

    European Deflation

    Military Actions

  • 4

    7 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    MARKET DECLINES: Typically Better to Buy than Bail

    S&P 500 Declines Since 1945: Magnitudes, Durations and Recoveries

    Source: S&P Capital IQ. Indexes are unmanaged, statistical composites and it is not possible to invest directly in an index. The returns shown do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back tested performance to be lower than the performance shown. Returns exclude dividends. Past performance is no indication of future results.

    Average Duration RecoveryType (% Decline) Count % Chg. in Months Mos.Pullbacks (5%-10%) 58 (7) 1 2Corrections (10%-20%) 19 (14) 5 4All Bears (20%+) 12 (28) 14 25 >"Garden Variety" (20%-40%) 9 (26) 11 14 >"Mega-Meltdown" (40%+) 3 (51) 23 58

    Average

    8 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    GLOBAL GDP: Projected Growth In Coming Quarters

    Source: Standard & Poors Economics, IHS Economics & Country Risk . Data as of February 15, 2013.

    Global Economic Growth Expected to Climb From 2.5% in 2013 to 3.7% by 2015

  • 5

    9 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    VALUATIONS: Seen as Appealing but Not Compelling

    S&P 500 EPS Actuals, Estimates, and Valuations as of 3/14/14

    Source: S&P Capital IQ.

    S&P 500 at 1841 Operating GAAP

    P/E Ratio on Trailing EPS (Dec. '13E) 17.0 18.4

    Median Trailing P/E Since 1988 17.7 19.6

    % Prem./(Disc.) To Avg. Since 1988 (4) (6)

    P/E Ratio on 2013E EPS 17.0 18.4

    P/E Ratio on 2014E EPS 15.2 15.3

    P/E Ratios

    $57

    $85 $99 $103

    $110 $118

    $30

    $50

    $70

    $90

    $110

    $130

    2009

    A

    2010

    A

    2011

    A

    2012

    A

    2013

    E

    2014

    E

    S&P 500 Operating EPS

    10 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    Source: S&P Capital IQ, BLS. Indexes are unmanaged, statistical composites and it is not possible to invest directly in an index. The returns shown do notreflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual performance to be lower than the performance shown. Returns exclude dividends. Past performance is no guarantee of future results.

    VALUATIONS: S&P 500 P/E CPI Relationship

    Asof3/14/14,theS&P50012MonthTrailingGAAPP/ERatioTradedataDiscounttotheAverageSince1948WhenInflationWasBetween1.5%and2.5%

    12-Month S&P 500 Frequency

    Observation Quintiles Trailing Discount/ % Chg Next of Price

    (CPI Ranges) GAAP-P/E Premium 12 Months Advance

    Current: Y/Y CPI at 1.5% 18.4X NA ??? NA

    Lowest 20% (=5.5%) 10.1X 81.7 8% 71%

    All Observations 17.6X 4.4 9% 72%

  • 6

    11 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    VALUATIONS: The Rule of 20

    The S&P 500s P/E on Trailing 12-Month GAAP P/E Plus CPI Should Equal 20 in a Fairly Valued Market

    Source: S&P Capital IQ. Past performance is no guarantee of future results.

    10

    100

    1,000

    10,000

    Dec

    -48

    Dec

    -53

    Dec

    -58

    Dec

    -63

    Dec

    -68

    Dec

    -73

    Dec

    -78

    Dec

    -83

    Dec

    -88

    Dec

    -93

    Dec

    -98

    Dec

    -03

    Dec

    -08

    Dec

    -13

    S&P 500 Rule of 20 Value

    12 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    VALUATIONS: The Rule of 20

    By this Metric, Valuations Remain Attractive

    Source: S&P Capital IQ. Past performance is no guarantee of future results.

    CPI

    Y/Y Q4 '13E Mid-Point Q4 '14E

    % Chg. $100 $105 $110

    1.6 1845 1935 2024

    1.8 1825 1914 2002

    2.0 1805 1893 1980

    2.2 1785 1871 1958

    2.4 1765 1850 1936

    2.6 1745 1829 1914

    S&P 500 Level Based on GAAP EPS

  • 7

    13 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    HISTORICAL RELATIONSHIPS: Inflation and Rates

    AverageMonthlyBondYieldPremiumstoHeadlineCPIFrom4/30/533/14/14

    Source: S&P Capital IQ, Federal Reserve. Indexes are unmanaged, statistical composites and it is not possible to invest directly in an index. The returns shown do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back tested performance to be lower than the performance shown. Returns exclude dividends. Past performance is no guarantee of future results. * Since 1971.

    Headline 10-Year I.G. S.G. Conv.

    CPI T-Note Bonds Bonds Mortgages*

    Averages 3.7% 6.1% 6.5% 7.4% 8.6%

    Avg. Prem. to CPI NA 2.4% 3.1% 4.1% 4.3%

    Today 1.6% 2.7% 4.5% 5.1% 4.3%

    Implied Levels 1.6% 4.0% 4.7% 5.7% 5.9%

    14 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    HISTORICAL RELATIONSHIPS: Rates and Returns

    AverageMonthlyTotalReturnsDuringMonthsofRising/Falling10YearTreasuryNoteYields:12/31/76 2/28/14

    Source: S&P Capital IQ, Russell, NAREIT, WSJ, Federal Reserve. Indexes are unmanaged, statistical composites and it is not possible to invest directly in an index. The returns shown do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back tested performance to be lower than the performance shown. Returns include dividends. Past performance is no guarantee of future results.

  • 8

    15 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    YIELD DIFFERENTIALS: Narrow Is Usually Good

    AverageS&P500Forward12MonthPricePerformanceFollowingQuarterlyDividendYieldvs.TreasuryYieldDifferentials.Dataasof12/31/532/28/14.

    Source: S&P Capital IQ, Federal Reserve. Indexes are unmanaged, statistical composites and it is not possible to invest directly in an index. The returns shown do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back tested performance to be lower than the performance shown. Returns exclude dividends. Past performance is no guarantee of future results.

    16 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    VALUATIONS: EPS Yield Minus 10-Yr. Yield Spread Favors Stocks

    Stocks Still Look Relatively Attractive to Bonds based on the S&P 500 Operating EPS Yield Minus 10-Year T-Note Spread Since 1988

    Source: S&P Capital IQ, Federal Reserve. Past performance is no guarantee of future results.

    -4.0

    -2.0

    0.0

    2.0

    4.0

    6.0

    8.0

    Dec

    -88

    Dec

    -89

    Dec

    -90

    Dec

    -91

    Dec

    -92

    Dec

    -93

    Dec

    -94

    Dec

    -95

    Dec

    -96

    Dec

    -97

    Dec

    -98

    Dec

    -99

    Dec

    -00

    Dec

    -01

    Dec

    -02

    Dec

    -03

    Dec

    -04

    Dec

    -05

    Dec

    -06

    Dec

    -07

    Dec

    -08

    Dec

    -09

    Dec

    -10

    Dec

    -11

    Dec

    -12

    Dec

    -13

    Dec

    -14

    -1 Std. Dev.

    +1 Std. Dev.

    EPSYieldSpreadNow3.0pointsvs0.5avgsince'88and6.6in9/11.Est.

  • 9

    17 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    HISTORY: Boring is Beautiful

    40% of the total return for the S&P 500

    since 1926 has come from reinvested

    dividends!

    Source: S&P Dow Jones Indices..

    18 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    S&P 500 YIELDS: Large Contributors to Total Returns

    AveragePercentageofTotalReturnRepresentedbytheDividendYield19362013

    Source: S&P Capital IQ. Past performance is no guarantee of future results.*1936-1939. **Data through 12/31/13.

  • 10

    19 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    DIVIDENDS: Getting Harder to Find Non-Payers

    ThePercentageofCompaniesinEachBenchmarkthatPaysaDividendAsof3/6/14

    Source: S&P Capital IQ. Past performance is no guarantee of future results.

    20 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    PAYOUT RATIO: Averaged More Than 50%

    CurrentRolling12MonthPayoutRatioisWellBelowtheLongTermAverage

    Source: S&P Capital IQ. Past performance is no guarantee of future results.

  • 11

    21 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    Source: S&P Capital IQ. Past performance is no guarantee of future results. Defensive: Consumer Staples, Health Care, Telecom Services, and Utilities. Cyclical: Consumer Discretionary, Energy, Financials, Industrials, Info. Technology and Materials.

    VOLATILITY: Defensive Also Means Lower Beta

    AverageBetasoftheDefensiveandCyclicalSectorsintheS&P500.Dataasof3/14/14

    22 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    Source: S&P Capital IQ. Past performance is no guarantee of future results.

    VOLATILITY: Increases as Bull Markets Age

    Number of Times Per Bull Market Year from 12/31/49 through 3/14/14 that the S&P 500 Advanced/Declined 1% or More in a Single Day

  • 12

    23 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    PercentageGainRequiredtoGetBacktoBreakevenAfterDeclineSeverity

    Source: S&P Capital IQ.

    VOLATILITY:LowerVolatility=LessNeededtoRecover

    24 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ.

    SINCE 2000: Benefiting from Quality and Yields

    U.S.EquityBenchmarkPerformances:12/31/992/28/14

    Source: S&P Capital IQ. Indexes are unmanaged, statistical composites and it is not possible to invest directly in an index. The returns shown do not reflect payment of any sales...

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