The second quarter of 2025 was defined by a tug-of-war between mounting macro uncertainty and the still-ample cash balances of global allocators. For dividend-oriented investors, the set-up proved fertile: defensive cash-flow franchises were re-rated higher while quality cyclical exposures with true pricing power attracted fresh inflows. Within the Hilton Dividend & Yield Strategy (“DIVYS”) we leaned into that backdrop, rotating out of policy-exposed laggards and redeploying into compounders and tariff-resilient industrial innovators. The result was a quarter of solid absolute gains and meaningful outperformance versus our benchmark.
Macro and Market Backdrop
Last quarter was characterized by an elevated but orderly cost-of-capital backdrop, in which long-term Treasury yields rose alongside stubborn inflation and expanding budget shortfalls, yet market volatility and corporate credit spreads remained unexpectedly subdued.
- Cost of capital. Treasury yields climbed alongside sticky inflation and widening fiscal gaps, yet cross-asset volatility and credit risk stayed remarkably calm.
- Growth and labor. Underlying activity remained solid, but the jobs market is cooling at the edges, continuing unemployment claims reached 1.96 million, the highest level since late 2021, signaling a slower, though still positive, hiring backdrop.
- Inflation. Core PCE rose 2.7% year-over-year in May, essentially unchanged from the prior two quarters and well above the Fed’s target, leaving policymakers little appetite to ease.
- Fiscal stance. The federal deficit is running at roughly 6.7% of GDP, keeping issuance pressure on the long end of the curve.
- Rates. The curve bear-steepened: the 10-year ended the quarter at 4.2%, the 30-year neared 4.8%, while the 2-year was down to 3.7% (~3.9% at end of 1Q), widening the 2s-10s spread.
- Volatility and liquidity. Despite the rate back-up, the MOVE index slipped into the high-80s, the VIX stayed under 17, and high-yield spreads tightened to roughly 270 bp, evidence of ample global liquidity.
- Equities. Market leadership narrowed further around mega-cap AI beneficiaries; fewer than ten stocks account for the S&P 500’s year-to-date advance, pushing forward P/E multiples above 20×.
Strategy Performance and Positioning
Performance was driven primarily by stock selection (+212bp relative), however, our macro-overlay added +90bps of relative performance via the allocation effect. An overweight posture in Communication Services, anchored by META and XLC, generated a significant positive spread as the sector recovered from early-spring consolidation. Our “special situations” tilt inside Consumer Staples, highlighted by a new position in British American Tobacco and a reduction of Coca-Cola, also helped, as investors sought companies capable of driving outsized earnings growth potential amid tariff-driven uncertainty. Conversely, our conscious sale of UNH in the first quarter as well as our strategic unweight allocation to pharmaceuticals proved to be a prudent move for the portfolio. On a broader basis, the Investment Committee remains bullish on Artificial Intelligence as more use cases become imbedded into corporate best-practices. As such, the Committee took advantage of depressed valuations in Taiwan Semiconductor (TSMC), Analog Devices (ADI), and added a new position in TE Connectivity (TEL).
Market Tailwinds During 2Q25
- Fiscal Stimulus via One Big Beautiful Bill.
- Inflation: Core PCE at 2.7% (Decelerating from Jan.).
- Falling Energy Prices (<$70 per Barrell).
- Narrowing Credit Spreads (<3% HY).
- Cooling Trade Tensions (Especially with China).
- AI-Spend Remains Robust.
Market Headwinds During 2Q25
- Extended Valuations (SPX trading +22x NTM EPS).
- Trash Spreads (i.e., CCC & Lower) Remain Elevated at ~3.85%.
- Rising US Continuing Claims (highest since 2021).
- U.S. Fiscal Stance Remains Unsustainable.
DIVYS Strategy 2Q25 Review:
The second quarter delivered the sharp rebound we sought after March’s tariff-driven wobble. By rotating into tariff-insulated cash-compounders and high-quality growth mega-caps such as Unilever, British American Tobacco, META, and Oracle, and by expanding our overweight to Information Technology, Communication Services and Consumer Discretionary, we positioned the portfolio to harvest both safe yield and idiosyncratic upside. We simultaneously lightened lower-conviction exposures, exiting NetApp, NextEra, and Merck, trimming Apple and Coca-Cola, and redeploying that capital into high-quality financials like Wells Fargo and asset-light alternatives managers. These trades, coupled with modest adds to Real Estate and Utilities, shifted the portfolio toward businesses with higher earnings growth potential and balance-sheet flexibility, without sacrificing the downside protection that dividend investors prize.
Performance
The payoff was immediate. After trailing our benchmark by >100bps in the first quarter, the Hilton Dividend & Yield Strategy advanced 8.7% gross / 8.6% net in the three months to June 30th, outstripping the Nasdaq U.S. Dividend Achievers’ 5.7% gain by ~300bps and lifting our year-to-date lead to 1.7%. The majority of second-quarter excess return came from stock selection. Communication Services, where T-Mobile, and the sector ETF together returned more than 13 percent versus a 3 percent loss for the benchmark cohort, supplied the largest slice of alpha. Real Estate added further lift thanks to the outsized recovery in American Healthcare REIT, while our underweight in mega-cap AI hardware, was more than offset by double-digit gains in information-infrastructure names such as TE Connectivity and Cisco. Financials also helped: carefully chosen compounders like BlackRock, 3i Group and Ares appreciated between 12 and 23%, beating the benchmark’s broad bank basket by a comfortable margin. As a result, the portfolio not only recaptured the ground ceded in 1Q but also finished the first half firmly ahead of the benchmark, all while maintaining a forward dividend yield ~2.2% and a beta below 0.85.
Portfolio Adjustments
- Rotation into tariff-resilient consumer cash-flow compounders
We initiated a 1% position in Unilever (UL) and a 1.5% percent stake in British American Tobacco (BTI), two global staples franchises whose idiosyncratic growth engines and geographically diverse revenue mix help insulate earnings from the newly imposed US macro uncertainty. The BTI purchase was funded in part by trimming an over-valued, lower-growth position in Coca-Cola (KO), thereby lifting portfolio yield while exchanging soda-exposed volume risk for under-appreciated next-generation nicotine upside.
- Upgrading industrial and energy infrastructure exposure
We added 1% to General Dynamics (GD), capturing marine-defense tailwinds, and established a 1% weight in TE Connectivity (TEL), whose diversified connector portfolio stands to benefit from EV adoption / autonomous driving and liquid-cooled AI-server demand. At the same time, we exited NextEra Energy (NEE) on legislative risk to renewable-tax credits and redeployed the proceeds into the broader XLU utilities ETF to maintain sector exposure while reducing single-name volatility. A modest top-up to Analog Devices (ADI) rounded out the industrial tilt as evidence grew that the analogue-chip cycle had troughed.
- Rebalancing the technology stack toward proven earnings visibility
Early-quarter weakness allowed us to raise Taiwan Semiconductor (TSMC) at an attractive valuation, deepening our exposure to indispensable foundry capacity and AI-driven consulting, respectively. We also trimmed Apple (AAPL) to mitigate China supply-chain risk and exited NetApp (NTAP) to avoid margin pressure from tariff-inflated NAND costs. These moves collectively shifted the portfolio away from hardware names vulnerable to import levies and toward service and design franchises with steadier free cash flow.
- Concentrating capital in high-quality financial franchises
With market expectations for bank-sector consolidation improving, we increased BlackRock (BLK), Truist Financial (TFC), and Wells Fargo (WFC) - all trading at compelling valuation discounts versus their historical averages - while trimming residual exposure to lower-conviction money-center peers. The adjustments emphasize fee-based asset-management growth and cost-cutting optionality, positioning the strategy to capture operating-leverage upside as credit conditions remain benign.
- Enhancing dividend durability in communication services
We built on our 1Q shift toward mission-critical connectivity by adding to Motorola Solutions (MSI), whose backlog resilience, recurring-software mix and upcoming Silvus acquisition reinforce its secular earnings trajectory. The purchase was financed by trimming the broad FDIS consumer-discretionary ETF, recycling capital from tariff-sensitive retailers into a defensive, higher-yield name that can pass through cost inflation.
- Streamlining healthcare exposure
Following new strategic headwinds and China-related guidance cuts, we fully exited Merck (MRK) and redeployed proceeds into higher-conviction holdings such as BTI and MSI. This decision reduced regulatory uncertainty and sharpened the portfolio’s focus on companies with clearer cash-return road-maps.
Taken together, these second-quarter trades raised the strategy’s forward dividend yield, broadened geographic and sector diversification, and tilted exposure toward companies with higher growth and tariff resilience. The portfolio enters the second half better balanced across defensible income streams and positioned to compound capital through an uncertain macro backdrop.
Quick Snapshot of 2Q25 Attribution
- Average allocation to cash was up at 3.14%, however, new positions were primarily funded with existing positions.
- The yield on the portfolio as of 06/30/2025 was 2.18% and the 1-year Beta was 0.91.
- The Dividend and Yield Strategy returned 8.74% gross (8.58% net) for 2Q 2025, which was 304 bp ahead of the benchmark return*.
- Relative to the Nasdaq US Broad Dividend Achievers (DAATR), DIVYS was overweight Information Technology, Communication Services, Consumer Discretionary, Real Estate, and Energy.
- Relative to the Nasdaq US Broad Dividend Achievers (DAATR), DIVYS outperformed in Communication Services, Health Care, Consumer Discretionary, Financials, Real Estate, Consumer Staples, and Utilities
- For 2Q25, top single-name contributors included Comm. Services SPDR ETF (XLC), Meta Platforms (META), Quest Diagnostics (DGX), Fidelity Cons. Disc. ETF (FDIS), Ares Management (ARES), 3i Group (TGOPY), Wells Fargo (WFC), American Healthcare REIT (AHR), Phillip Morris (PM), British American Tobacco (BTI), Taiwan Semiconductor (TSMC), Oracle (ORCL), IBM (IBM), Analog Devices (ADI), Emerson Electric (EMR) and Itochu (ITOCY).
- For 2Q25, top single-name detractors included Apple (APPL), Accenture (ACN), Chevron (CVX), Avalon Bay (AVB), AstraZenica (AZN), Amgen (AMGN), and T-Mobile (TMUS).
- The DIVYS Strategy one-year standard deviation of 10.4% vs. benchmark of 10.9%.
Portfolio Outlook
Given the reduction in trade uncertainty and continued fiscal stimulus, we remain constructive yet balanced between opportunity and risk.
- Policy clarity without a growth shock. With the One Big Beautiful Bill now law and average tariffs settling near 10 percent, we anticipate only a one-time price adjustment that is likely to be spread across global supply chains rather than disrupt end-demand. The bill’s investment incentives, together with the ongoing wave of AI capital spending, should provide a floor for earnings.
- Persistent inflation and structural deficits. Core PCE is still running above 2.5%, and a federal deficit of roughly 6% to 7% of GDP argues for a higher long-term neutral rate. We therefore expect the Treasury curve to keep rebuilding term premium, reinforcing our preference for short duration and a tilt toward floating-rate or callable credit instead of long bonds.
- Equity leadership that is narrow but beginning to broaden. Although the “Magnificent 7” continue to dominate index returns, we are seeing fresh capital flow into cash-returning enablers such as IBM, Oracle, Cisco, select large banks like Wells Fargo and Bank of America, and energy infrastructure names including Williams. We believe this broadening will gather pace as investors reassess stretched valuations at the very top of the market.
In short, we foresee a “growth-with-sticky-inflation” environment persisting through year-end. By pairing quality, dividend-supported equities with short-duration, high-carry credit—and by maintaining dry powder—we stand ready to capture upside from secular AI adoption and a steeper yield curve while retaining the agility to add risk when volatility improves prospective returns.
*Benchmark: NASDAQ US Broad Dividend Achievers
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 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.