Why Global Growth? Market Commentary 2018 WHEN INVESTORS ARE LOOKING FOR YIELD, many may consider dividend-paying equities. s offer a potentially consistent form of return and may help buffer risk during market declines. Investing in dividend-paying equities outside the U.S. may provide the opportunity for further portfolio diversification,* higher yields and the potential for attractive long-term total return. Based on data from Bloomberg, of the world's 500 largest companies by market capitalization, more than 5 currently pay a dividend. In looking at just the top 50 companies, as of December 31, 2017, nearly 4 were based outside the United States. The next decade will certainly lead to the growth of several emerging economies, but we believe it may also be marked by the return of a classic form of equity investing via dividend-paying companies. The purpose of this paper is to expand on the topic of dividend investing. In our analytical piece titled "Why s?" we reviewed the empirical evidence regarding the potential to provide solid risk-adjusted returns, build wealth and increase portfolio cash-flow via dividend investing. This paper highlights the attractiveness and merits of non-u.s. dividends and why they might serve a place in a properly diversified portfolio. For comparison purposes, international stocks are represented by the MSCI EAFE Index, an index that does not include a weighting in the United States, and U.S. stocks are represented by the S&P 500 Index. ADDING INTERNATIONAL EQUITIES to a domestic portfolio has been widely discussed as a means of enhancing diversification. Most would acknowledge that international investing offers an expanded opportunity set. Casting A Wider Net Broadens Opportunity Adding international equities to a domestic portfolio has been widely discussed as a means of enhancing diversification. Most would acknowledge that international investing offers an expanded opportunity set, citing statistics such as these: As of the end of 2016, the United States accounted for just 42% of the world s equity market capitalization. 1 There were roughly 39,000 international equities compared to just 4,300 U.S. equities at the end of 2016. 1 Significant changes in the world economy have led to new growth opportunities. * Diversification does not insure against loss in a declining market. 1 Source: World DataBank, World Development Indicators, World Federation of Exchanges as of 12/31/16. Most recent data available. Past performance is no guarantee of future results. NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
Why Global Growth? 2018 This flattening world has led to a 47% increase in exports as a percentage of global gross domestic product (GDP) since 1990. 2 Coinciding with these trade enhancements, companies have embraced international accounting standards, opening once inaccessible capital markets to outside investors. The next two decades are expected to bring greater urbanization, an aging world population and a significant emerging market middle class. A Total Approach to International Investing Many market participants believe that earnings growth has been the driver of long-term returns. As illustrated in Exhibit 1, in the U.S., decade by decade, with the exception of the 1990s, a period marked by excess valuations, dividends have been a significant contributor to total return for equity investors. But more recently outside the U.S., dividends have contributed significantly to long-term returns, even making up for a negative price return. Exhibit 1: s as a Percentage of Total 1970s (1/31/70 12/31/79) 1980s (1/1/80 12/31/89) 1990s (1/1/90 12/31/99) 2000s* (1/1/00 12/31/09) Post Great Recession (12/31/09 12/31/17) 2017 (1/1/17 12/31/17) U.S.: S&P 500 Total Breakdown Total Price Income Appreciation (s) As a Share of Total Price Appreciation Income (s) Non-U.S.: MSCI EAFE Total Breakdown Total Price Income Appreciation (s) As a Share of Total Price Appreciation Income (s) 6.6% 2.4% 4.2% 37. 63.1% 10.3% 6. 4.3% 58.2% 41.8% 17.2% 12.6% 4.7% 72.9% 27.1% 22.7% 19. 3.2% 85.9% 14.1% 18.2% 15.3% 2.9% 84.1% 15.9% 7.3% 5.3% 2. 72.6% 27.4% -0.9% -2.7% 1.8% N/A N/A 1.6% -1.1% 2.6% N/A N/A 13.9% 11. 2.4% 83. 17. 6.7% 3.3% 3.4% 49.1% 50.9% 21.8% 19.4% 2.4% 89. 11. 25.6% 21.8% 3.8% 85. 15. 12/31/07 12/31/17* 8. 6.2% 2.3% 72.7% 27.3% 2.4% -0.9% 3.4% N/A N/A * The analysis provided by Ned Davis indicates that the data is not applicable because the Income data is disproportionately high versus the other decades due to the low or negative Total s during these periods. The information provided in this analysis may not represent the full value of reinvested dividends. Data source: Ned Davis Research, Inc. as of 12/31/17. Further distribution prohibited without prior permission. Copyright 2018 Ned Davis Research, Inc. All rights reserved. Past performance is no guarantee of future results. performance is based on equal-weighted geometric average, computed monthly. income return is based on the return percentage of all dividend-paying companies in the S&P 500 and MSCI EAFE Index. The returns do not reflect the deduction of any fees, expenses or taxes, and assume reinvestment of all income. Investors cannot invest in an index. 2 Source: World DataBank, World Development Indicators, World Federation of Exchanges as of 12/31/16. Most recent data available. Past performance is no guarantee of future results. 2
Why Global Growth? 2018 Growth Stocks Have Outperformed With Less Risk Ultimately, the goal for every investor is to maximize return while minimizing risk. As illustrated in Exhibit 2, the Growers segment of the MSCI EAFE Index has experienced higher returns with lower standard deviation, a measure of risk, than non-paying companies and ones that either reduced or never changed their dividend. Exhibit 2: Non-U.S Growth Companies Have Outperformed with Less Risk MSCI EAFE Stocks Risk vs. 1 % Annual Total % Annual Standard Deviation - -1 3 2 1 Growers Growers Payers w/ No Change Payers w/ No Change Non- Payers Non- Payers Cutters Cutters Sharpe Ratio 0.6 0.3 0.0-0.3-0.6 Growers Payers w/ No Change Non- Payers Cutters Data source: Ned Davis Research, Inc. from 8/31/94-12/31/17. Further distribution prohibited without prior permission. Copyright 2018 Ned Davis Research, Inc. All rights reserved. Past performance is no guarantee of future results. Investing entails risk, including the loss of principal. s are not guaranteed and will fluctuate. yield is one component of performance and should not be the only consideration for investment. For a description of how each stock is grouped by dividend policy, See Endnotes on the last page of this report. Sharpe Ratio measures the efficiency of a portfolio by quantifying the returns received for the risk assumed. It is calculated by taking the return of a portfolio above a risk free rate divided by the portfolio standard deviation. Non-U.S. Stocks: An Opportunity for a Wide Range of Yields A diversified portfolio across the globe can provide a wide range of yields across countries and sectors. Exhibit 3: Non-U.S. Stocks Showed Higher Yields in Most Sectors 6% MSCI EAFE Index S&P 500 Index Most non-u.s. sectors provide enhanced yields versus the U.S., Yield (%) 4% 2% with 9 out of the 11 MSCI EAFE sectors having had higher yields, with utilities and energy being the Cons. Disc. Cons. Staples Energy Financials Health Care Industrials Info. Tech. Materials Real Estate Telecom Utilities highest yielding. Data source: FactSet as of 12/31/17. Sector Yield (Annual Rate) of the MSCI EAFE Index vs. S&P 500 Index. Securities are free float adjusted, classified in accordance with the Global Industry Classification Standard (GICS ), and screened by size, liquidity and minimum free float. Past performance is no guarantee of future results. 3
Why Global Growth? 2018 Exhibit 4: Stocks in Several Developed Countries Produced Higher Yields than the U.S. Yield (%) 4% 3% 2% 1% In terms of country breakdown, the U.S. delivered relatively low dividend yields compared to several developed market countries. United States Japan Germany Canada France United Kingdom Australia Data source: FactSet as of 12/31/17. Past performance is no guarantee of future results. The yield of the United States is represented by the S&P 500 Index, while for all other countries represented, the representative MSCI country index is used. To construct an MSCI country index, every listed security in the market is identified. Securities are free float adjusted, classified in accordance with the Global Industry Classification Standard (GICS ), and screened by size, liquidity and minimum free float. Looking Beyond Yield for Faster Growth Although international stocks may enhance a portfolio's yield, a sole focus on higher yield may lead investors to forego faster dividend growth opportunities over the long term. In addition, selecting companies based on length of dividend growth history may also reduce a portfolio's dividend growth. As illustrated in Exhibit 5, international companies with either a yield less than the MSCI EAFE Index (below-market yielders) or less than 10 years of consecutive dividend increases (recent dividend growers) have both exhibited a faster dividend growth rate. Exhibit 5: Broader Opportunity Set May Lead to Faster Growth 5-Year Trailing Growth Rate Companies by Yield * Companies by Consecutive Years of Increases * * 1 1 13% Growth Rate 11% Growth Rate 1 1 1 Growth Rate 11% Growth Rate Less Than MSCI EAFE Below Market Yielders MSCI EAFE Yield: 3. Greater Than MSCI EAFE Above Market Yielders Less Than 10 Years Recent Growers 10 Years Greater Than 10 Years Mature Growers * Non-dividend payers and companies that cut their dividend over the last 5 years are not included. ** Non-dividend payers, companies that kept their dividend flat and those that cut their dividend over the last 5 years are not included. Data source: FactSet as of 12/31/17. Past performance is no guarantee of future results. Corporate Cash: A Potential Catalyst For Growth The level of corporate cash on a company s balance sheet is potentially a positive sign for the payment of future dividends. The Great Recession caused companies to adjust by cutting costs, reducing corporate spending and modifying corporate governance. But many free cash flow generating businesses used this period as an opportunity to strengthen their balances sheets. As a result, in 2009 corporate cash levels rose to near record levels in 20 years. As the world economy improved, many companies began to put their cash to work, which varied from capital reinvestment projects, share buybacks, or dividend increases, and in some cases engaging in all three. 4
Why Global Growth? 2018 Exhibit 6: Non-U.S. Companies Corporate Cash Levels and s Total Liquid Assets as % of Net Worth MSCI EAFE Nonfinancial Companies Total s MSCI EAFE Nonfinancial Companies Cash and Short Term Investment as % of Total Market Cap 3 2 1 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 $150 $100 $50 $0 2017 Total s Paid ($ Billions) As global economies continue to recover from the Great Recession, companies will need to decide how to deploy their increased corporate cash which in some cases may be dividend payments. Data source: Ned Davis Research, Inc. from 9/30/07-9/30/17. Further distribution prohibited without prior permission. Copyright 2018 Ned Davis Research, Inc. All rights reserved. Past performance is no guarantee of future results. The annual total liquid assets at market value, ending September 30, 2017, as a percentage of net worth of nonfarm, nonfinancial corporate businesses and the total dividends paid in USD for the MSCI EAFE countries. The periods shown represent the history maintained by the source; most recent data available. Conclusion Investors have certainly been tested over the last few years. As a result, dividends will likely become more important as both a potential risk buffer and a consistent form of return. While investing in dividends outside the United States presents attractive yields and a wider economic footprint gained, investors would be well served to focus on a company's ability to grow their dividends. Research has shown that investors seeking to maximize total return should consider additional factors beyond dividend yield, such as the fundamentals behind a company, which may be reflected in their corresponding dividend growth rate. An ideal portfolio may include companies that demonstrate strong fundamentals across a wide range of dividend yield and growth rates. We believe that the next decade will certainly lead to the growth of several emerging economies but may also be marked by the return of a classic form of equity investing via dividendpaying companies. 5
Why Global Growth? 2018 For more information, please contact your financial advisor and visit nuveen.com or contact Santa Barbara by visiting sbasset.com. ENDNOTES Exhibit 2 The chart illustrates the average annualized historical performance of the MSCI EAFE Index stocks, grouped as shown according to their dividend policies, using Worldscope data based on the financial statements of reportable companies. (No. Growers: 407; No. of No-Change: 142; No. of Non-Payers: 15; No. of Cutters: 47). Each stock s dividend policy is determined on a rolling 12-month basis. For example, a stock is classified as dividend-paying if it paid a cash dividend at any time during the previous 12 months. growers include stocks with a positive quarter over quarter trailing 12 month dividend per share change. cutters include stocks that lowered their existing dividend or stopped paying regular dividends during the preceding 12 months. A stock is reclassified only if its dividend payments change. The performance of each group is based on the equal-weighted geometric average of dividend-paying and non-dividend paying historical MSCI EAFE Index stocks, rebalanced annually. The performance shown represents the risk-return characteristics of each of the categories. The returns do not reflect the deduction of any fees, expenses or taxes. s for stocks that paid dividends assume reinvestment of all income. Performance returns may have been negative during this time period. It is not possible to directly invest in an unmanaged index. The periods shown do not represent the full history of the MSCI EAFE Index; it is the history maintained by the data source. None of the categories shown here predicts or depicts the performance of any Santa Barbara Asset Management portfolio s investment strategy. GLOSSARY The MSCI EAFE Index is a free float-adjusted market capitalization weighted index designed to measure developed market equity performance, excluding the U.S. and Canada. The S&P 500 Index is an unmanaged index generally considered representative of the U.S. stock market. You cannot invest directly in an index. Santa Barbara Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen, LLC. RISKS AND OTHER IMPORTANT CONSIDERATIONS This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor's objectives and circumstances and in consultation with his or her advisors. This commentary should not be relied upon as investment advice, recommendations, offers or solicitation of any particular security, asset class, fund, strategy, or investment product. Investing entails risk, including the possible loss of principal. There can be no assurance that any investment or asset class will provide positive performance over any period of time. yield is one component of performance and should not be the only consideration for investment. s are not guaranteed and will fluctuate. Equity investments such as largecap stocks are subject to market risk or the risk of decline in response to adverse company news, industry developments, or a general economic decline. Past performance does not guarantee future results. The statements contained herein reflect the opinions of Santa Barbara Asset Management, LLC ( Santa Barbara ) as of the date written. Certain statements are forward looking and/or based on current expectations, projections, and information currently available to Santa Barbara. Such statements may or may not be accurate over the long-term. While we believe we have a reasonable basis for our comments and we have confidence in our opinions, actual results may differ from those we anticipate. We cannot assure future results and disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. Statistical data was taken from sources which we deem to be reliable, but their accuracy cannot be guaranteed. 428341-INV-Y-02/19 GPE-BGLODV-0218P Nuveen 333 West Wacker Drive Chicago, IL 60606 800.752.8700 nuveen.com