The third quarter was a solid period for the strategy, particularly on a relative basis. The Dividend & Yield strategy delivered a positive absolute return while its primary dividend benchmark declined, and we used the quarter to sharpen the balance between long-term growth and valuation discipline. We continued to participate in the AI ecosystem but became more selective about where the economics of adoption are most likely to translate into durable earnings, free cash flow, and dividend growth.
The third quarter was a strong one, bringing the strategy ahead of its benchmark year to date. The Dividend & Yield Composite returned +0.58% gross / +.40 net (preliminary) while Nasdaq US Dividend Achievers Index (DAAX) declined −0.62%, a 120-basis-point advantage on gross returns. That puts the Composite ahead of its benchmark year to date, with a return of +8.67% gross / +8.20 net versus +8.12% (preliminary) for the DAAX. We’re pleased with these results, which reinforce our focus on combining dividend income and growth with thoughtful sector allocation and a measured approach to valuations to deliver attractive long-term total returns.
What we think makes the strategy different is the way we combine dividend income with participation in earnings growth. As we have emphasized in previous letters, our objective is not to maximize today's yield at the expense of tomorrow's opportunity. Instead, we seek to invest in businesses with the earnings and cash flow to support both growing dividends and capital appreciation, while remaining mindful of the valuations we pay. We believe this approach offers investors a more attractive balance of current income and long-term growth than a strategy focused on yield alone.
The strategy’s underlying fundamentals reflect this philosophy. At the close of the third quarter, the strategy had a five-year earnings growth CAGR of ~15.9%, a forward twelve-month P/E of ~18.4x, a dividend yield of approximately 2.01%, and a three-year dividend growth CAGR of ~16.1%. In our view, these characteristics illustrate our ability to capture meaningful earnings and dividend growth mixed with an attractive yield without paying excessive prices. Importantly, we believe this combination provides multiple avenues for long-term total returns, as earnings growth supports future dividend increases while reasonable multiples leave room for capital appreciation.
Furthermore, that combination also reflects a sector mix that looks beyond traditional dividend peers, with greater participation in Technology and Communication Services. We pursue these opportunities within S&P 500-relative sector guardrails: ±3 percentage points for most sectors and, following this quarter’s update, ±10 for Technology, up from ±5 previously. With Technology’s index weight nearly doubling since our 2014 inception, the updated wider band preserves the strategy’s original flexibility while maintaining our original risk discipline.
Our largest trades this quarter reflected this approach by adding to Microsoft and initiating on RELX PLC, an enterprise software company, while trimming semiconductor exposure, and increasingly diversifying into non-AI related opportunities, such as Lockheed Martin, PepsiCo, and Camden Property Trust.
Security selection overwhelmingly drove third quarter Composite outperformance, contributing approximately 110 basis points, with asset allocation providing an additional modest tailwind. Together, these effects reconcile to the approximately 120 basis points of reported Composite outperformance.
Information Technology was the largest positive sector contributor to relative results. Its total attribution effect was approximately 82 basis points, overwhelmingly driven by security selection. The sector's active contribution to return was meaningful with SAP and NVIDIA among the strongest positive security-selection contributors, while not owning benchmark semiconductor-equipment holdings such as KLA and Lam Research also supported relative results.
Beyond Technology, Industrials led relative performance with a 37-basis-point contribution, followed by Communication Services at 29 basis points. Consumer Staples, Materials, and Utilities added another 20, 19, and 16 basis points, respectively. The takeaway is straightforward; outperformance comes not only from owning rising stocks, but also from navigating weaker sectors better than the benchmark.
The primary sector-level headwinds came from Health Care, Consumer Discretionary, and Financials, which detracted approximately 34, 32, and 10 basis points of relative performance, respectively. Consumer Discretionary selection was positive, but allocation detracted approximately 47 basis points. Health Care experienced both allocation and selection headwinds while both Energy and Real Estate made modest positive total attribution contributions to the strategy.
At the security-selection level, aside from SAP and NVIDIA, Philip Morris, Emerson Electric, Broadcom, and AT&T were top relative performers. Applied Materials and Microsoft were the largest security-selection headwinds, with Williams and Taiwan Semiconductor also weighing on relative results. However, relative weakness does not necessarily mean a loss. For example, Microsoft added absolute returns but detracted versus the benchmark. We generally cap large- individual positions at 5% or less to manage concentration and volatility. That discipline can limit relative upside when benchmark-heavy names rally, but we believe the trade-off supports a more balanced risk-reward profile.
At quarter-end, the strategy held approximately 31.8% in Technology versus 39.8% for the S&P 500 and 23.7% for DAAX. Our roughly 8-percentage-point underweight to the S&P 500 reflects the flexibility afforded by the newly expanded Technology band of ±10 percentage points, up from ±5, allowing us to retain meaningful growth exposure while managing concentration risk. All other sectors are within the ±3 percentage point mandate. As previously mentioned, DAAX remains our primary performance benchmark, while the S&P 500 anchors our sector risk guardrails.
The trades listed herein encompass all transactions executed under the strategy during the third quarter (July 1 – September 30). This update is intended to offer a complete and transparent reflection of trading activity for the third quarter of 2026.
Strategy activity during the quarter continued our focus on valuation disciple and diversification. We trimmed selected AI exposures not simply to reduce risk, but to invest where expectations were less demanding. If AI delivers the productivity and margin improvements needed to justify today’s spending, its benefits should extend well beyond infrastructure providers. With many non-AI businesses trading at substantial discounts to their historical valuations, we saw opportunities to broaden the holdings and capture those potential benefits at more attractive prices.
We fully exited Qualcomm on July 1 following the reductions made in the prior quarter. The exit reflected our view that the market had increasingly capitalized a successful outcome for the company's longer-term data-center and GPU ambitions, while valuation, volatility, and execution uncertainty had become less attractive.
We trimmed Caterpillar on July 2 and subsequently fully exited the remaining position a few days later. We continued to appreciate the company's exposure to data-center power demand, but believed valuation left less room for disappointment. Our concern was that rising memory costs could alter the timing and composition of AI infrastructure budgets, making Caterpillar more sensitive to capital-spending expectations than we wanted at the prevailing multiple.
We redeployed the proceeds into Lockheed Martin as a more value-oriented way to diversify the portfolio. Our investment case centered on a relatively reasonable valuation, the potential for improved program execution, and a supportive long-term defense-spending backdrop. We recognized the risks from the F-35 program and classified-project write-downs, but believed the position offered a differentiated demand driver and reduced dependence on the AI capital-spending narrative.
With this narrative in mind, we trimmed Applied Materials following a strong move in the shares. We remained constructive on the company's long-term exposure to leading-edge logic, memory, and advanced packaging, but viewed the valuation as increasingly demanding. The reduction was intended to harvest gains and moderate risk while preserving meaningful participation in the semiconductor-equipment opportunity.
Similar to our Lockheed purchase, we initiated a position in PepsiCo using the proceeds from AMAT, where we believed the valuation discount relative to Coca-Cola more than reflected the uncertainty surrounding the North American snacks and beverage businesses. This was a self-help investment rather than a claim that the near-term operating picture was already resolved. We saw potential for improved value perception, product innovation, and volume stabilization to support a better earnings trajectory, while recognizing that execution remained the key risk.
Later in the month, we made a few trades within financials. Notably, we increased our Citigroup and UBS positions while reducing Truist. These trades reflect our broader view that large-cap banks would continue to outperform smaller banks. Moreover, the team lacked confidence in Truist’s new management team after reviewing their track record at past firms.
We increased Microsoft by 50 basis points in mid-august, bringing our holding to a full position. The addition reflected stronger conviction in the company's ability to monetize AI through Azure, enterprise software, and its existing distribution. Our investment case emphasized the breadth of demand, the potential for multiple monetization channels, and the ability to preserve operating leverage despite substantial infrastructure investment. We preferred exposure to visible monetization rather than simply assuming that higher AI spending would translate into attractive returns for every participant.
Later in the month, we exited Microchip Technology and initiated a 0.75% position in RELX. The Microchip sale was primarily a portfolio-construction decision, we already held meaningful exposure to Analog Devices and wanted to reduce overlap within semiconductors. It did not represent a blanket negative view on Microchip's business.
RELX offered a different way to participate in the AI transition. We believed the market's disruption concerns understated the value of proprietary legal, insurance, identity, fraud, and verification data. Our thesis was that AI could enhance the usefulness of these information franchises rather than simply replace them. Recurring revenue, strong cash conversion, dividends, and consistent capital returns made RELX a natural fit for DIVYS, while its return drivers were less dependent on continued acceleration in physical AI infrastructure spending.
We further trimmed Applied Materials to 1.00% and Broadcom to 2.42% on September 3. These reductions reflected position sizing and a desire to moderate aggregate exposure to AI infrastructure spending. We remained constructive on AI adoption, but recognized that improvements in model efficiency, custom silicon, hardware performance, and utilization could allow usage to grow rapidly while incremental infrastructure requirements grew more slowly.
Applied Materials is particularly sensitive to the pace of semiconductor capital investment, which can weaken before underlying chip demand if customers conclude that planned capacity is sufficient. We retained a position because the long-term opportunities in advanced logic, high-bandwidth memory, and advanced packaging remained attractive. Broadcom also remained a meaningful holding, supported by custom-accelerator and networking opportunities. Its trim was not a change in our fundamental view of the company.
Going along with the broader theme of the quarter, we used these proceeds to initiate a 1.00% position in Camden Property Trust in an effort to add idiosyncratic growth names. Our thesis centered on improving Sun Belt apartment leasing conditions that had not yet been fully reflected in reported earnings. We saw an opportunity in the gap between a recovering physical apartment market and backward-looking financial results, with improving resident affordability and a diminishing competitive supply burden supporting the potential for stronger future rent growth.
Camden also offered a differentiated capital-allocation and valuation case. We viewed the company's asset quality, conservative leverage, and ability to repurchase shares or pursue acquisitions as important supports for the investment. Lower rates could provide an additional catalyst, but our thesis did not depend on them. A constrained future supply pipeline and the relative affordability of renting could also support existing properties if rates remained elevated.
Towards the end of the quarter, we fully exited Truist and Dow Chemical’s following disappointing performance and further management credibility concerns and initiated a starter position in Texas Roadhouse. We’ve long admired Texas Roadhouse for its double-digit earnings algorithm and its remarkable operating leverage, however, the stock has materially de-rated over the past few months due to rising beef prices and consumer fatigue. We believe these are short-term headwinds for the company as we expect beef prices to fall over the quarters ahead, which should be accretive to margin. We expect Texas Roadhouse to be a longer-term holding as these near-term headwinds dissipate.
All performance is preliminary and unaudited.
We remain constructive on equities but believe the next opportunities may extend beyond the companies that have led the market over the past several years. AI remains an important theme, though our focus is increasingly on whether investment translates into durable earnings and cash flow. If the spending delivers the productivity and margin benefits investors expect, those gains should reach businesses across the broader economy. With many non-AI companies trading at substantial discounts to their historical valuations, we see opportunities to participate at more attractive prices.
Interest rates remain an important consideration, particularly for dividend-paying stocks. Higher bond yields raise the competition for investor capital and can pressure equity valuations, making dividend growth and balance-sheet strength especially important. Lower rates could provide support, but we prefer businesses whose investment cases do not depend on that outcome. Our focus is on sustainable cash generation, manageable financing needs, and the ability to grow shareholder distributions.
We continue to find opportunities in defense, apartments, consumer businesses, and other dividend-paying franchises with company-specific catalysts. These exposures complement our technology holdings and reduce reliance on a single spending cycle or market narrative. We are not stepping away from growth; we are broadening where we look for it.
For the strategy, the objective remains straightforward: combine current income, growing dividends, and capital appreciation without paying excessive valuations or accepting unnecessary concentration. We enter the remainder of 2026 encouraged by our progress and focused on building on it with the same investment discipline
Sincerely,
The Hilton Dividend & Yield Strategy Investment Team
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.
The performance information contained herein is unaudited, was calculated by HCM and is shown on both a gross-of-fee and net-of-fee basis. The performance results herein include the reinvestment of dividends and/or other earnings, and the net-of-fee performance results are shown net of the actual advisory fees paid by the client accounts in the HCM Dividend & Yield Composite. In addition, actual client accounts may incur other transaction costs such as brokerage commissions, custodial costs and other expenses. Accordingly, actual client performance will differ, potentially materially, particularly given that the net compounded impact of the deduction of investment advisory fees over time will be affected by the amount of the fees, the time period, and the investment performance. For additional information about the composite, please contact us - info@hiltoncm.com
All investing involves risks including the possible loss of capital. Asset allocation and diversification do 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.