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Equity Income and Dividend Growth Strategies 603 N Indian River Drive, Suite 300, Fort Pierce, FL 34950 www.melvillewealthmanagement.com 772-460-2500 1 WHY CONSIDER EQUITY INCOME SOLUTIONS AND DIVIDEND GROWTH EQUITIES • Dividends have historically been an excellent wealth creator • Going back to 1960, 79.5% of the total return of the S&P 500 index can be attributed to reinvested dividends and the power of compounding • Current income streams available are higher than 10 year treasury • Income generation has the ability to increase over time versus traditional bonds • Provides inflation protection • Dividend Equity Characteristics • Historically less volatile relative to other equities • Strong balance sheets and hard to “fake” cash payments to shareholders • Demand for income from investments increasing from aging population, pensions and endowments with few available alternatives • Ability to globally diversify using familiar names >40% of S&P 500 revenue is generated overseas 2 DIVIDENDS AS A WEALTH CREATOR Over time, dividends have historically provided a powerful contribution to total return The Power of Dividends and Compounding: Growth of $10,000 (1/1960 - 12/2011) $1,200,000 $1,070,191 $1,000,000 S&P 500 Total Return (With Dividends) S&P 500 Price Only (No Dividends) $800,000 80% of return attributed to dividends and compounding $600,000 $400,000 $216,415 $200,000 $0 1960 3 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 DIVIDENDS AS A WEALTH CREATOR ’66 high to ’82 low: -1.18% Price +4.66% Price + Div ’00-date: 11 yrs ’09 Credit Crisis: mid-pattern low (6469) to next peak: ?/? ’66-’83: 17 yrs ’29-’55- 26 yrs ’74 Nixon resigns: mid-pattern low to next peak: 19 yrs/ 17x gain ’42 WWII: mid-pattern low to next peak: 24 yrs/ 10x gain 4 Fact Set; Morgan Keegan Equity Strategy DIVIDEND ATTRACTIVE FOR INCOME VS. TRADITIONAL BONDS Why Dividends Now? S&P 500 Stock Dividends Versus 10 Year Treasury Yields (1953 – 2010) 18 16 14 12 10 8 6 4 2 0 5 Apr-09 Apr-05 Apr-01 Apr-97 Apr-93 Apr-89 Apr-85 Apr-81 Apr-77 Apr-73 Apr-69 Apr-65 Apr-61 Apr-57 Apr-53 10 Year Treasury Yield S&P 500 Dividend Yield Yield Comparisons (As of 12/31/2011) 3Mo Libor 0.58% 3Mo Treasury 0.02% 2-year Treasury 0.25% 10-year Treasury 1.89% 10-year TIPS -0.07% S&P 500 Div. Yield* 2.22% *As of 12/31/11 INFLATION PROTECTION Dividend growth equities offer ability to increase income over time vs. traditional bonds 41 YEAR HISTORY OF INCOME, INFLATION, AND S&P 500 DIVIDENDS Average Income1 Consumer Price Inflation2 S&P 5003 Per Share Dividend 1967=100 1970 $11,773 116 $3.13 2008 $80,535 644 $28.58 Pct. Increase 584% 455% 813% 1Census Bureau: Table H-1. Average of Income Limits for Each Fifth and Lower limit of Top 5 Percent of All Households: 1967 to 2008 2 Bureau of Labor Statistics: All items: 1967=100 and Poor’s 500 Index: An index of 500 stocks chosen by market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. 3 Standard 6 INFLATION PROTECTION The last decade dividend growth was 3.55 times higher than CPI Dow Jones Industrial Average (DJIA): The DJIA is a price‐weighted average of 30 actively traded blue chip stocks, representing between 15 percent to 20 percent of the market value of all NYSE stocks. Prepared and published by Dow Jones & Company, it is the oldest and most widely quoted of all the market indicators Recession Periods - United States Cpi-U All Items U.S. City Average Sa 1982-84=100 - United States 220 1999-2009: DJIA Dividends climb 103% 1999-2009: CPI: 29% 12/31/09$297.14 share; 2.85% 12/31/99 $146.36/share; 1.27% 220 210 200 200 190 190 180 180 170 Courtesy: Fact Set 1982 = 100 210 12/31/99: $168.80 '00 7 12/31/09: $217.22 170 Courtesy: Fact Set '01 '02 '03 '04 '05 '06 '07 '08 '09 POTENTIAL DIVIDEND GROWTH VS. TRADITIONAL BONDS Cash on corporate balance sheets at all time high Real Level of Cash on Corporate Balance Sheets at Record Levels (Adjusted for Inflation) $2,000 $1,800 $1,600 Federal Reserve Board Nonfarm Nonfinancial Corporate Business Total Liquid Assets, Flow of Funds (in Billions) $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 1945 1955 1965 Data Source: Federal Reserve, 10/11. Numbers are adjusted for inflation. 8 1975 1985 1995 2005 POTENTIAL DIVIDEND GROWTH VS TRADITIONAL BONDS 9 POTENTIAL DIVIDEND GROWTH VS. TRADITIONAL BONDS Payout Ratios have room to increase S&P 500 Dividend Per share S&P 500 Annual EPS Payout Ratio Dec-70 3.13 5.51 56.81% Dec-75 3.68 7.71 47.73% Dec-80 6.2 14.98 41.39% Dec-85 7.89 15.69 50.29% Dec-90 12.12 21.61 56.09% Dec-95 13.7 35.38 38.72% Dec-00 15.85 54.19 29.25% Dec-05 22.48 72.53 30.99% Dec-10 22.83 83.33 27.40% Year Source: Bloomberg; Morgan Keegan Equity Strategy Group 10 DIVIDEND GROWERS OFFER OPTIMAL RISK/REWARD: ESPECIALLY IN A VOLATILE MARKET Returns & Volatility Return of S&P Index1 Stocks by Dividend Policy: (January 1972-December 2011) 1.22 8.59% Return Return 7.01% 6.90% 1.35% -0.88% Dividend Dividend No Change Equal- Dividend Dividend Growers & Payers in Dividend Weighted NonCutters & Initiators Policy S&P 500 Payers Eliminators 11 Volatility 9.38% Volatility of S&P Index1 Stocks by Dividend Policy: (January 1972-December 2011, as shown by beta) 0.87 0.94 1.00 1.29 1.00 Dividend Dividend No Change Equal- Dividend Dividend Growers & Payers in Dividend Weighted Cutters & NonInitiators Policy S&P 500 Eliminators Payers DIVIDEND GROWERS OFFER OPTIMAL RISK/REWARD BETTER THAN JUST PLAIN OLD HIGH DIVIDENDS Why growers are better than just plain old high dividends. Historical Outperformance From Dividend-Growing Stocks 12 DIVIDEND GROWERS OFFER OPTIMAL RISK/REWARD High… But Not Highest 13 DIVIDEND INCREASES MAY COME FROM UNEXPECTED AREAS Bloomberg Semiconductor Index: Quarterly data 3/06 – 9/11 140 8 $7.56 7 120 6 100 Dividend Per share 80 5 4 60 40 20 Payout Ratio $3.20 3 2 26% 19% Bloomberg and Raymond James Equity Strategy 14 9/1/2011 6/1/2011 3/1/2011 12/1/2010 9/1/2010 6/1/2010 3/1/2010 12/1/2009 9/1/2009 6/1/2009 3/1/2009 12/1/2008 9/1/2008 6/1/2008 3/1/2008 12/1/2007 9/1/2007 6/1/2007 3/1/2007 12/1/2006 9/1/2006 6/1/2006 0 3/1/2006 0 1 PAYOUT RATIOS AND CASH LEVELS: RAYMOND JAMES CUSTOMIZED INDICES 1 15 Raymond James Financial Services: Why Cash Hoards Are Destroying Equity Value In Tech (Year 2) ; Tavis McCourt Companies in each sector include: Technology – ADI, BRCM, NSM, TXN, BMC, CA, CSC, GOOG, MSFT, ORCL, A, AAPL, CSCO, GLW, DELL, EMC, HPQ, IBM, JNPR,MOT, QCOM, GRMN, NOK, INTC, STM, TSM, ERIC, RIMM, ORCL, ADBE, AMD, ALU, MU, SNDK, NVDA, FSLR, ALTR Telecom Services – T, CTL, VZ, WIN Utilities – EXC, PCG, PEG, ED, AEE Consumer Products – NKE, COH, VFC, RL, KO, MO, GPS, EL, TGT, ANF Industrials – ITW, TYC, HON, CAT, DE, CBE, GE, UTX, BWA, JCI IMPLEMENTING A HYPOTHETICAL DIVIDEND STRATEGY 16 DISCLOSURE Data provided by Raymond James Asset Management Services. Information contained in this presentation was received from sources believed to be reliable, but accuracy is not guaranteed. This material is for informational purposes only and should not be used or construed as a recommendation regarding any security outside of a managed account. Investing involves risk, including possible loss of principal invested. Past performance does not guarantee future results. There is no assurance that any investment strategy will be successful or that any securities transaction, holdings, sectors or allocations discussed will be profitable. It should not be assumed that any investment recommendation or decisions made in the future will be profitable or will equal any investment performance discussed herein. Please note that all indices are unmanaged and investors cannot invest directly in an index. An investor who purchases an investment product that attempts to mimic the performance of an index will incur expenses that would reduce returns. Past performance is not indicative of future results. The performance noted in this presentation does not include fees and costs, which would reduce an investor's returns. The S&P 500 is an unmanaged index of 500 widely held stocks. The Dow Jones Industrial Average is an unmanaged index of 30 widely held securities. Fixed income securities are subject to interest rate risk. Generally, when interest rates rise, bond prices fall, and vice versa. Specific-sector investing can be subject to different and greater risks than more diversified investments. The Consumer Price Index (CPI) is a measure of inflation. Investing in small-cap and mid-cap stocks generally involves greater risks, and, therefore, may not be appropriate for every investor. International investing also involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government. Diversification does not guarantee a profit nor protect against loss. Dividends are not guaranteed and will fluctuate. The London InterBank Offered Rate, or LIBOR, is the average interest rate at which a select group of large, reputable banks that participate in the London interbank money market can borrow unsecured funds from other banks. Enterprise Value (EV) is a measure of a company’s value, often used as an alternative to straightforward market capitalization. Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Payout Ratio is the amount of earnings paid out in dividends to shareholders. Raymond James & Associates, Inc., makes a market in TRMK. 17 Theresa DeBello Branch Operations Manager 772-460-2500 Toll-Free: 800-445-4767 [email protected] www.MelvilleWealthManagement.com Charlotte Gabrich Operations Specialist 772-460-2500 Toll-Free: 800-445-4767 [email protected] www.MelvilleWealthManagement.com Holly Kramer Client Service Associate 772-460-2500 Toll-Free: 800-445-4767 [email protected] www.MelvilleWealthManagement.com Brooke Sparks Client Service Associate 772-460-2500 Toll-Free: 800-445-4767 [email protected] www.MelvilleWealthManagement.com Raymond James & Associates, Inc., member New York Stock Exchange/SIPC © 2012 Raymond James & Associates, Inc. member New York Stock Exchange/SIPC