Beyond Traditional Dividends: How DIVYs Compounded in 2025

The fourth quarter of 2025 marked a fitting conclusion to a year defined by narrow leadership, late-cycle Artificial Intelligence (“AI”) enthusiasm, and sharp factor rotations. While headline equity indices continued to grind higher, returns once again became increasingly concentrated in a small subset of momentum-driven exposures, particularly within healthcare and select AI-adjacent names, creating a challenging backdrop for disciplined, income-oriented strategies.

Against this environment, the Hilton Dividend & Yield Strategy (“DIVYS”) finished 2025 with strong absolute returns and meaningful full-year outperformance versus traditional dividend peers, while modestly underperforming our primary benchmark* during the fourth quarter. Importantly, this short-term divergence reflects intentional portfolio construction decisions, not a deviation from our long-term compounding framework.

What Drove Performance in 2025 – And Why it was Different

For the full year, the DIVYS composite delivered a +15.9% gross return(15.3% net), substantially outperforming many widely held dividend strategies while maintaining a lower-volatility profile.

• DIVYS composite: gross +15.9%, net +15.3%
• ProShares S&P 500 Dividend Aristocrats (NOBL): ~+7.3%
• Schwab U.S. Dividend Equity ETF (SCHD): ~+4.5%

A defining feature of DIVYS’ composite 2025 performance was that outperformance was driven overwhelmingly by security selection rather than sector bets. We feel that this is a sharp contrast to many traditional dividend and value-oriented strategies. Over the year, security selection contributed meaningfully positive relative performance, while asset allocation was a modest headwind—an intentional outcome given our disciplined sector-neutral framework.

Top contributors in 2025 reflected a portfolio intentionally constructed around dividend growth, free cash flow durability, and earnings optionality, rather than static yield or backward-looking value screens. Our top five performing securities for the year were Taiwan Semiconductor, Philip Morris, British American Tobacco, Corning, Teradyne. In combination with these securities, select Communication Services exposure helped drive our excess returns, underscoring the benefits of owning cash-generative enablers and compounders that sit outside the traditional dividend playbook.

We think that this is a meaningful departure from legacy dividend strategies, which tend to concentrate in low-growth Industrials, Utilities, and Financials with limited reinvestment optionality. In contrast, DIVYS’ winners were largely companies with structural earnings growth drivers, improving margins, and capital allocation flexibility, characteristics that translated directly into both price appreciation and accelerating dividend growth.

Fourth Quarter Performance: What Drove the Divergence

During the fourth quarter, the DIVYS Composite returned +0.4% gross (+0.3% net), compared with +1.9% for the benchmark*, resulting in approximately 150 bps of relative underperformance to the benchmark.

Attribution was highly concentrated:

• Healthcare sector allocation accounted for all of the relative drag plus some
• Security selection was modestly positive
• Cash and FX effects were negligible

Healthcare: A Benchmark Construction Issue, Not a Thesis Failure

Healthcare experienced a sharp, factor-driven rebound late in the year as capital rotated out of crowded AI trades and into perceived defensive growth. Our benchmark* carries a structurally higher healthcare weight, while DIVYS maintains a strict ±3% sector-neutral constraint versus the S&P 500 (±5% for tech).

This discipline exists for a reason.

We intentionally avoid allowing the strategy to drift materially away from the broader earnings growth engine of U.S. large-cap equities, even when benchmarks temporarily benefit from outsized sector tilts. While this limits short-term tracking error flexibility, we believe it reduces long-term regime risk and preserves consistency through market cycles.

Importantly, healthcare exposure within DIVYS was increased during the quarter, with additions of four diversified, cash-generative leaders; Abbott Laboratories, Johnson & Johnson, UnitedHealth, and Labcorp. We believe these companies offer more attractive risk-adjusted return profiles than higher-beta pharmaceutical momentum plays.

4Q25 Portfolio Actions: De-Risking Late-Cycle Enthusiasm

The fourth quarter was defined by selective de-risking and quality rotation, not a wholesale repositioning. As the market increasingly rewarded late-cycle momentum, particularly in AI infrastructure and certain high-multiple compounders—we used strength to trim crowded exposures, exit positions where risk/reward had become asymmetric, and redeploy into higher-conviction industrial, infrastructure, and healthcare compounders that improve the portfolio’s durability into 2026.

October: Funding higher-conviction cyclicals and AI “picks-and-shovels.”

Early in the quarter, we made several funding trims and initiated new positions:

• Trimmed Procter & Gamble (PG), Intercontinental Exchange (ICE), and AvalonBay (AVB) as sources of funds, PG on tariff/consumer trade-down pressures, ICE due to its defensiveness in a momentum-driven tape, and AVB given rate sensitivity and muted rental turnover dynamics.
• Initiated Caterpillar (CAT) to add exposure to a broader set of cyclicals beyond AI, supported by a high-margin services mix and multi-engine end-markets (construction, mining, energy/transport).
• Initiated Teradyne (TER) as a targeted AI hardware “picks-and-shovels” expression via semiconductor test/automation.
• Sold Tractor Supply (TSCO) and initiated Abbott Laboratories (ABT) to upgrade portfolio defensiveness and healthcare quality.
• Fully exited AvalonBay (AVB) and increased Prologis (PLD), upgrading REIT exposure toward a platform with improving industrial fundamentals and incremental data-center optionality.

Later in October, we executed a larger rebalance across Industrials, Technology, and defensive compounders:

• Exited Waste Management (WM) and Texas Instruments (TXN), reallocating away from names where near-term upside appeared limited versus execution/integration or competitive/cycle risks.
• Increased several core industrial/infrastructure holdings: General Dynamics (GD), Siemens (SIEGY), Emerson (EMR), and Xylem (XYL), emphasizing backlog visibility, margin durability, and multi-cycle earnings power.
• Increased select “quality tech yielders” and AI-adjacent enablers while keeping discipline on sizing: Analog Devices (ADI), Cisco (CSCO), and Taiwan Semiconductor (TSM).
• Trimmed Qualcomm (QCOM) as part of position sizing and risk/reward refinement within semis.

November: Reducing late-cycle AI crowding; rebuilding healthcare ballast.

In November, we leaned further into risk management as the market narrative became more concentrated:

• Trimmed Corning (GLW) and Meta (META) to reduce exposure to high-multiple, momentum-adjacent names where positioning risk had risen.
• Initiated UnitedHealth (UNH) (and later increased UNH) to restore defensive balance and add exposure to a healthcare bellwether after a significant sentiment reset.
• Trimmed Oracle (ORCL) twice and trimmed TE Connectivity (TEL), reflecting a more cautious view on the sustainability of debt-funded AI infrastructure build-outs and reducing cyclicality after meaningful multiple expansion.
• Exited GLW fully after additional strength, further monetizing gains and reducing crowding risk.
• Increased ABT and UNH and initiated Labcorp (LH), broadening healthcare exposure toward diversified, cash-generative franchises with attractive valuation and durable compounding profiles.
• Trimmed Visa (V) and initiated Johnson & Johnson (JNJ), both to manage asymmetry (V) and add high-quality, diversified healthcare exposure with reliable dividend characteristics (JNJ).

December: Macro-sensitive rotation and continued de-risking.

In December, we continued to rotate away from more rate-sensitive cyclicals and high-beta expressions:

• Exited Lennar (LEN) and increased FDIS (consumer discretionary exposure), reflecting a more cautious view on the forward housing setup and a preference for diversified discretionary exposure over a single rate-sensitive homebuilder.
• Trimmed Teradyne (TER) as part of the ongoing reduction in higher-beta AI-related exposure after a strong run.
• Increased Motorola Solutions (MSI), rotating into a high-quality defensive growth compounder with resilient backlog and a recurring software mix that has been underappreciated in a momentum-driven market.

In sum: fourth quarter actions were designed to reduce late-cycle concentration risk, improve the portfolio’s defensive balance (notably via healthcare upgrades), and allocate toward durable industrial and infrastructure compounders, while staying firmly within our sector discipline and yield mandate.

Quick Snapshot of 4Q25 Attribution:

• Quarter end allocation to cash was up at 2.16% (from 1.68% in 3Q) due to recent sales.
• Yield on the portfolio as of 12/31/25 was 2.1% and the 1-year beta was 0.81.
• The Dividend and Yield Strategy returned 15.9% (15.3% Net) for FY 2025, which was ahead of the benchmark* by 136 basis points.
• Relative to the Nasdaq US Broad Dividend Achievers (DAATR), DIVYs was overweight Information Technology, Consumer Discretionary, Communication Services, Real Estate, and Energy.
• For the fourth quarter of 2025, the top contributors included LLY (+41bps), TER (+34bp), AZN (+20bp), AMGN (+17bp), CAT (+17bps), CSCO (+13bp), PLD (+12bp), WFC (+12bp), ADI (+11bp), BTI (+10bp), ITOCY (+10bp). **
• For the fourth quarter of 2025, the top detractors included TMUS (-15bp), HD (-15bp), and META (-10bp). **
• The DIVYs Strategy continues to maintain a low standard deviation versus the market one-year standard deviation of 9.0% vs. benchmark* of 7.7% and the S&P 500 of 10.5%.

Outlook

As we look ahead, we believe the equity market is transitioning from a period of extreme concentration toward one defined by greater dispersion across sectors, balance sheets, and earnings durability. While secular growth themes, most notably AI, remain intact, the next phase of the cycle is likely to reward selectivity and cash-flow quality over broad beta exposure or narrative-driven positioning.

AI Growth Continues, but With Greater Discipline

AI remains a powerful multi-year driver of investment and productivity. Global AI-related capital spending exceeded $500 billion in 2025 and is projected to move higher in 2026. However, after several years of rapid acceleration, we expect the rate of growth to moderate as funding costs, balance-sheet capacity, and return thresholds become more binding constraints.

As a result, we believe capital will increasingly favor AI enablers with strong free cash flow, pricing power, and disciplined capital allocation, rather than highly leveraged or capital-intensive models where monetization timelines are less certain. This backdrop reinforces our preference for companies that can self-fund growth while sustaining and growing dividends, rather than those reliant on external financing.

Broadening Leadership Beyond AI

We also expect market leadership to broaden beyond a narrow group of mega-cap AI beneficiaries. Several sectors that have lagged in recent years now offer more attractive risk-adjusted return profiles, supported by improving fundamentals, reset expectations, and reasonable valuations.

Healthcare stands out in this regard. After multiple years of underperformance and estimate compression, many healthcare companies now combine durable demand, improving pipeline visibility, and attractive dividend growth, while remaining largely insulated from capital-spending cycles. We believe this creates a favorable setup as investors rebalance away from crowded growth trades.

Consumer and Earnings Backdrop

On the consumer side, moderating inflation and a more robust tax refund cycle may provide a modest tailwind to discretionary spending in 2026. While we do not expect a return to excess consumption, incremental improvement in real purchasing power should support select consumer franchises with pricing power and strong balance sheets.

More broadly, we expect earnings growth to become less index-driven and more company-specific, increasing the importance of security selection. In this environment, businesses with visible cash flows, disciplined reinvestment, and shareholder-friendly capital return policies should be well positioned.

Positioning Implications for DIVYS

For dividend-focused investors, we believe this backdrop favors strategies that emphasize:

• Dividend growth over static yield
• Free cash flow durability over accounting earnings
• Balanced sector exposure rather than concentration risk

DIVYS is positioned accordingly, with a focus on high-quality compounders capable of delivering competitive income today and faster dividend growth over time, while maintaining valuation discipline and diversification.

While periods of narrow leadership can create short-term relative noise, we remain confident that a disciplined, growth-aware dividend strategy offers the most compelling path to long-term income-driven compounding.

We appreciate your continued trust and partnership and look forward to navigating 2026 with the same focus on transparency, discipline, 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 trades listed herein encompass all transactions executed under the strategy during the fourth quarter (October 1 – December 31). This update is intended to offer a complete and transparent reflection of trading activity for fourth quarter of 2025.

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.