DIVYS 1Q26: Navigating a More Fragile Regime While Preserving Downside Discipline

The first quarter of 2026 marked a meaningful shift in the market environment. What began as a continuation of late-2025 optimism around broadening equity participation evolved into a more fragile and volatile backdrop, driven by rising geopolitical tensions, renewed inflation concerns, and increasing scrutiny around capital-intensive growth themes.

Against this backdrop, the Hilton Dividend & Yield (“DIVYS”) Composite returned -1.89% (Gross of fees) -2.02% (Net of fees) compared to -0.23% for our dividend benchmark* and -4.3% for the S&P 500. While the strategy underperformed traditional dividend benchmarks, it meaningfully outperformed the broader equity market on an absolute basis, reflecting its role as a hybrid between growth-oriented equities and income-focused strategies.

This distinction is central to how we think about DIVYS. The strategy is not designed to behave like a traditional high-yield or low-volatility dividend portfolio. Instead, it seeks to balance income, dividend growth, and capital appreciation. In periods like the first quarter, where defensive sectors outperform and benchmark composition becomes a dominant driver of returns, that positioning can create relative headwinds versus dividend indices. At the same time, it allows the portfolio to participate more constructively across cycles and, importantly in this quarter, provide downside protection relative to the broader market.

First Quarter Performance: Understanding the Divergence

Relative underperformance during the quarter was driven almost entirely by security selection, which detracted 183 basis points, while asset allocation contributed modestly positive results. This was not a quarter defined by a broad top-down positioning error. Instead, performance reflected a combination of benchmark composition effects, stock-specific weakness in select exposures, and our intentional bias toward higher-growth dividend compounders over more defensive yield-oriented names.

Consumer Staples represented the largest relative drag, though the underlying driver is important to contextualize. The benchmark* benefited from significant exposure to large defensive growth companies such as Walmart and Costco, which held up well as macro uncertainty increased, however, trade at extremely elevated multiples with increasingly crowded shareholder bases. DIVYS remains structurally underweight these exposures, since we believe their growth algorithms do not align with their current valuation multiples. Importantly, however, our core Staples holdings, including Philip Morris and British American Tobacco, contributed positively. The relative shortfall was therefore driven more by what we did not own, than by weakness in what we did.

Industrials were the second-largest headwind, detracting 92 basis points. This was driven by stock-specific weakness in names such as FANUC, Siemens, and Xylem, all of which lagged during the quarter. We do not view those outcomes as thesis-breaking. In each case, the longer-term drivers, such as automation, infrastructure investment, and service-led earnings durability, remain intact, but the quarter’s price action reflected a market that became less tolerant of international companies due to their foreign exchange exposure.

Communication Services also weighed materially on results, detracting 71 basis points. The largest issue here was the strategy’s exposure to the State Street Communication Services Selector Sector ETF (XLC), which lagged in a more volatile environment, along with weakness in our Meta Platforms position. Given that our benchmark* carries only a modest weight in Communication Services (~120 bps), while DIVYS maintains a disciplined sector framework tied to the S&P 500 (±3% bandwidth), our structurally higher exposure to the sector resulted in a meaningful relative headwind despite remaining consistent with the strategy’s income and diversification objectives.

On the positive side, Information Technology was the largest relative contributor, adding 117 basis points. That strength came from holdings such as Teradyne, Taiwan Semiconductor, Analog Devices, Motorola Solutions, Applied Materials, and Cisco, and reinforces our view that a dividend strategy can still create excess return through selective ownership of free-cash-flow-rich growth businesses. Health Care also contributed positively, adding roughly 41 basis points, led by names such as Eli Lilly, Quest Diagnostics, Labcorp, AstraZeneca, and Amgen. Those results helped offset some of the weakness elsewhere and reflect our continued preference for durable, cash-generative businesses with resilient demand and attractive dividend growth potential.

Portfolio Activity: From Refinement to De-Risking

Portfolio activity during the first quarter reflected a clear progression in our thinking as the macro environment evolved. We entered the year with a more constructive view on cyclical participation and earnings breadth, but as the quarter developed, rising geopolitical risks, increasing capital intensity across AI, and a more challenged cost-of-capital backdrop led us to shift toward greater selectivity, reduced exposure to capital-sensitive business models, and improved portfolio resilience.

The trades listed herein encompass all transactions executed under the strategy during the first quarter (January 1 – March 31). This update is intended to offer a complete and transparent reflection of trading activity for first quarter of 2026.

January: Initiating Selective Cyclicals and Upgrading Healthcare Exposure

We began the quarter by initiating a position in FANUC, establishing a starter allocation to a high-quality industrial automation franchise with a durable installed base and long-term optionality tied to robotics adoption. We are particularly attracted to the combination of cyclical recovery potential and recurring service revenue, with AI acting as a potential enabler that lowers deployment friction and expands use cases for automation over time.

Later in the month, we exited T-Mobile and initiated a position in Merck. The decision to sell T-Mobile followed a reassessment of execution risk under a new management team and a growth profile that had clearly begun to decelerate. While the stock continued to trade at a premium multiple, we saw increasing competitive pressures and longer-term risks, including the potential for alternative connectivity solutions, which reduced our confidence in the risk/reward.

In contrast, Merck offered a more compelling opportunity to upgrade healthcare exposure. The company’s acquisition of Cidara Therapeutics added a late-stage antiviral asset with meaningful commercial potential, helping to offset longer-term concerns around Keytruda’s loss of exclusivity. At current valuation levels, we view Merck as offering an attractive combination of earnings durability, pipeline optionality, and balance sheet strength, making it a strong addition within our healthcare allocation.

February: Exiting Alternatives, Refining AI Exposure, and Adding Defensive Infrastructure

February represented the most active period of the quarter and was defined by a broad repositioning away from capital-intensive and credit-sensitive business models, alongside a refinement of our AI exposure.

We exited positions in Apollo and Ares Capital and initiated a position in Franklin Resources. While Apollo has executed well operationally, our decision to exit was driven by growing concerns around the broader alternative asset management complex. The sector has become increasingly tied to AI-related infrastructure and data center deployment, where rising financing costs and tightening project economics are beginning to pressure returns. We also see an underappreciated layer of software and technology credit exposure embedded across private credit portfolios, which could come under pressure as AI disruption accelerates. Similarly, we exited Ares Capital due to structural concerns around the BDC model, including potential earnings pressure from declining asset yields and increasing competition compressing spreads.

We trimmed and ultimately exited our position in Ares Management over the course of the month, continuing our effort to reduce exposure to the alternative asset management ecosystem. While we continue to view Ares as a high-quality franchise, we believe the broader sector faces an increasingly asymmetric risk profile as fundraising, deployment, and return expectations adjust to a higher cost-of-capital environment.

At the same time, we initiated a position in Franklin Resources as a differentiated asset manager with a more asset-light, distribution-driven model. We see improving fundamentals driven by growth in ETFs and multi-asset solutions, supported by a global distribution platform that enables higher-quality, fee-generating AUM without incremental balance sheet risk.

Within Technology, we trimmed Oracle following its recent capital raise, which introduced balance sheet concerns and highlighted increasing reliance on external financing to support growth tied to AI infrastructure. We also trimmed Microsoft later in the month, despite strong underlying results, as we became more focused on the growing tension between elevated capital expenditures and near-term returns on invested capital.

We redeployed capital into Applied Materials, initiating a position as a high-quality way to express rising semiconductor capital intensity. We believe the next phase of AI investment will be increasingly driven by process complexity, advanced packaging, and memory requirements, all of which directly benefit Applied’s core franchise. We also increased our position in FANUC, where improving order trends and expanding robotics adoption reinforced our conviction in the long-term thesis.

In addition, we exited Intercontinental Exchange and initiated a position in National Grid. Our decision to exit ICE was driven by growing concern that generative AI could erode parts of its data and analytics moat, particularly in areas where automation may reduce switching costs or commoditize pricing and workflow tools. National Grid, by contrast, offers exposure to regulated transmission and distribution assets that are positioned to benefit from long-term electrification and AI-driven data center demand, while maintaining low exposure to commodity price volatility.

March: De-Risking International and Cyclical Exposure as Geopolitical Risk Escalated

As the quarter progressed and geopolitical tensions intensified, particularly surrounding the Iran conflict and its implications for energy markets and global supply chains, we shifted more decisively toward capital preservation and risk reduction.

We exited positions in 3i Group and Itochu following strong performance, as both names became increasingly exposed to foreign exchange and broader international macro headwinds. In the case of 3i, we were concerned about the sustainability of Action’s low-cost sourcing model in the face of potential supply chain disruptions. For Itochu, the stock had re-rated meaningfully above historical valuation ranges, and we saw limited upside relative to increasing exposure to energy costs and broader economic sensitivity in Japan.

We also trimmed IBM, reflecting our view that portions of its consulting and legacy infrastructure businesses face increasing disruption risk from generative AI and automation. While IBM has credible AI initiatives, we believe the near-term pressure on its services model creates a less attractive risk/reward profile relative to other opportunities in the portfolio.

We added further to Applied Materials, reinforcing our conviction in the company as a core beneficiary of AI-driven semiconductor investment. The company’s exposure to high-bandwidth memory, advanced nodes, and increasingly complex fabrication processes positions it well to benefit from a multi-year capital expenditure cycle across the semiconductor industry.

Finally, we trimmed our exposure to consumer discretionary through FDIS, bringing the sector to our maximum underweight. This reflects a more cautious view on the consumer as energy prices rise and inflationary pressures increase, potentially weighing on discretionary spending. By raising liquidity and reducing cyclical exposure, we have positioned the portfolio to better navigate a more uncertain macro environment while preserving flexibility to deploy capital should opportunities arise.

Quick Snapshot of 1Q26 Attribution:

• Quarter end allocation to cash was up at 6.41% (from 2.16% in 4Q25) due to recent sales and market volatility.
• Yield on the portfolio as of 3/31/26 was 2.16% and the 1-year beta was 0.87
• The Dividend and Yield Composite returned -1.89% (Gross of fees) -2.02% (Net of fees) for 1Q26, which was behind the benchmark* by 166 basis points. However, DIVYs outperformed the S&P 500’s -4.3% return over the same period.
• Relative to the Nasdaq US Broad Dividend Achievers (DAATR), DIVYs was overweight Information Technology, Consumer Discretionary, Communication Services, Real Estate, Utilities, and Energy.
• For 1Q26, top contributors included TER (+51bp), TSM (+34bp), LLY (+31bp) ADI (+31bp), WMB (+26bp), XLU (+26bp), DGX (+18bp), V (+17bp), CVX (+14bp) MSI (+13 bp). **
• For 1Q26, top detractors included XLC (-36bp), FDIS (-27bp), WFC (-24bp), ARES (-20bp), FANUC (-20bp), META (-17bp), Siemens (-15bp), XYL (-14bp), HD (-13bp), BEN (-11bp), UL (-10bp).**
• The DIVYs Strategy continues to maintain a low standard deviation versus the market, one-year standard deviation of 9.7% vs. benchmark* of 8.3% and the S&P 500 of 9.9%.

Outlook: From Broad Beta to Selective Compounding

Looking ahead, we believe the investment landscape is transitioning away from a period defined by narrow, liquidity-driven leadership toward one characterized by greater dispersion, higher macro sensitivity, and increased emphasis on capital discipline.

Artificial intelligence remains a powerful secular driver, but the market is clearly entering a more discriminating phase. In prior periods, broad exposure to AI-related themes was sufficient. Today, outcomes are increasingly determined by monetization, balance sheet strength, and the ability to generate returns on invested capital. We continue to favor companies that benefit from AI through pricing power and incremental demand, rather than those reliant on sustained external financing or long-duration assumptions.

At the same time, the macro backdrop has become more complex. Geopolitical tensions and energy market volatility have increased the probability of a more stagflationary environment, where growth slows but inflation remains persistent. In this setting, we expect investors to place a greater premium on free cash flow durability, balance sheet strength, and dividend sustainability.

For dividend-focused investors, this reinforces our core philosophy. We believe the most attractive opportunities lie in companies that can grow dividends over time, supported by strong underlying cash generation, rather than those offering higher static yields but limited reinvestment potential. It also underscores the importance of maintaining balanced sector exposure, rather than allowing the portfolio to become overly concentrated in traditionally defensive areas that may lag over a full cycle.

Closing Thoughts

While the first quarter presented a challenging relative environment versus traditional dividend benchmarks, it also demonstrated an important feature of the DIVYS strategy: the ability to provide meaningful downside protection relative to the broader equity market while maintaining exposure to long-term growth drivers.

Periods of divergence are inevitable for a strategy that sits between pure income and pure growth. However, we remain confident that this balanced approach offers a compelling path to long-term, income-driven compounding, particularly as the market environment becomes more selective and less reliant on broad multiple expansion.

We appreciate your continued trust and partnership and look forward to navigating the remainder of 2026 with the same focus on discipline, transparency, and thoughtful capital allocation.

Sincerely,
The Hilton Dividend & Yield Strategy Investment Team

*Benchmark: NASDAQ US Broad Dividend Achievers
** For attribution the companies listed represent all that contributed +10 (or -10) basis points or greater to performance.

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.