The Advantages of Dividend Growth Stocks

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1 The Advantages of Growth Stocks How dividend growth stocks can be strong and steady contributors to long-term total returns August 2015 ManulifeAM.com

2 The Advantages of Growth Stocks As investors continue to search for higher-yielding investment options, many overlook dividends as a potentially important contributor to total return when analyzing investment performance. Over the last 40 years, the average dividend paying stock generated over 3.5 times more income than stocks that did not pay dividends. 1 At Manulife Asset Management we believe that investing in dividend paying stocks can be a compelling long-term investment strategy. In particular, Growers stocks that consistently increase their dividends can help to provide greater income with less volatility over time. From 1965 to 2015, more than 1/3 of the total return from all dividend paying S&P 500 stocks has come from dividends accounting for an even larger percentage of total returns during low-growth periods. 2 Not all dividend stocks are created equal Different dividend stocks generate different incomes over time. A company s stock dividend policy can help determine the return it may generate in the long run. How have stocks with different dividend policies performed over the past 40 years? Returns of S&P 500 stocks by dividend policy: the last 40 years % 10.0% 10.1% 9.3% 8.0% 7.6% 6.0% 4.0% 2.0% 0.0% Growers All dividend paying stocks Maintainers 0.1% Cutters/ Eliminators 2.6% Non-dividend paying stocks Annual gains % (Jan. 31, 1921-Dec. 31, 2014) Source: Ned Davis Research average of total returns of S&P 500 component stocks, reconstituted monthly. Past performance is no guarantee of future results. The S&P 500 is an index and is therefore not subject to fees and expenses. The returns presented consist of both capital appreciation and dividends reinvested. Growers anytime in the last 12 months, research as a grower for twelve months or until another change in dividend policy. 1 Source: Ned Davis Research as of December Based on monthly equal weighted geometric average of total returns of S&P 500 component stocks, reconstituted monthly. Past performance is no guarantee of future results. The S&P 500 is an index and is therefore not subject to fees and expenses. The returns presented consist of both capital appreciation and dividends reinvested. Growers / Initiators is a subset of dividend paying stocks and include stocks that increased their dividend anytime in the last 12 months. Once an increase occurs, it remains classified as defined by Ned Davis Research, as a grower for twelve months or until another change in dividend policy. 2 Source: FactSet, June Returns assume the reinvestment of all dividends and capital gains and do not account for sales charges. The S&P 500 Index is an unmanaged index of common stocks used to measure stock market performance. It is not possible to invest directly in an index. Past performance is no guarantee of future results. 2

3 The Advantages of Growth Stocks The advantages of dividend growth stocks Growers can offer a number of advantages: Providing greater stability Historically, Growers have provided a higher return over the long term with lower volatility measured by standard deviation than Payers and Non-Payers. This means Growers can be more stable and better withstand periods of market turbulence. Annualized Return... 10% Growers 8% 6% 4% 2%... Payers LOWER VOLATILITY Non-Payers 0% 10% 15% 20% 25% Annualized Volatility Source: Ned Davis Research, Morningstar and Goldman Sachs Asset Management, December 31, Paying and Non-Paying dividend stocks do not pay dividends and are defined by each stock s dividend policy that is determined on a rolling 12-month basis from March 2004-December Past performance does not guarantee future results. Acting as signs of quality Growers are often industry-leading companies with: n Consistent earnings and revenues (EPS or earnings per share certainty). n High free cash flow. n Attractive margins. n Strong return on equity (ROE). n Good risk controls. n A confident management team as management typically will not initiate or increase a dividend unless it is relatively certain that it can be maintained, this can be a sign of confidence in future earnings. A rising dividend and increasing stock price can together result in a stronger longterm total return demonstrating how dividend growth stocks slowly but steadily add value to a portfolio. Over the long term, high-quality stocks (A+ rated) with high ROE and earnings certainty can typically offer better riskadjusted returns with lower levels of volatility and better downside protection than lower quality stocks (C and D rated). 3

4 ... The Advantages of Growth Stocks High- and Low-Quality Strategies Risk vs. Reward Average annual return vs. annualized volatility (standard deviation) of returns (3/31/86-3/31/15) 13%... C & D Annualized Return 12% 11% 10% 9% 8% 7% 6% EPS Certainty A+ High ROE EPS Uncertainty Low ROE We believe that high-quality stocks offer better risk-adjusted returns 5% 12% 17% 22% 27% 32% Source: BofA Merrill Lynch, as of March 31, Volatility of Returns Potentially providing more income over time Growers can typically generate more income over time than stocks with a higher yield but slower dividend growth. While the yield on a Grower may be initially lower than a higher-yield stock, a rising dividend and an increasing stock price can together result in a stronger long-term total return demonstrating how dividend growth stocks slowly but steadily add value to a portfolio. Three hypothetical dividend growth scenarios Income (%) 25% 20% 15% 10% 5% 5% Yield with No Growth 4% Yield at 5% Growth 3.0% Yield at 12% Growth Income (%) 16% 8% 5% The dividend growth stock provided more than 3X the income of the higher yield stock. 0% Source: Manulife Asset Management. Based on hypothetical rates of return and are not intended to represent the performance of any of our current portfolios or any portfolio investment. Based on a hypothetical $500,000 account, using the hypothetical yields and growth rates presented for 5% Yield with No Growth and 4% Yield at 5% Growth and an average 3.0% yield and 12% growth. 4

5 The Advantages of Growth Stocks The Performers Strategy We believe that quality companies with a sustainable competitive advantage, stable earnings and revenues, cash flow generation and focus on shareholder value should outperform. A consistently increasing dividend is a sign of management s confidence in future earnings. The strategy n The Performers Strategy portfolio includes undervalued, high-quality, dividend paying companies. n To be included in the portfolio, stocks must have a history of at least five consecutive years of growing dividends and also meet our stringent, proprietary high - quality criteria including stocks that provide the best risk-adjusted returns versus other quality categories. n The portfolio includes companies with market caps typically greater than $2 billion that have better-than-peer cash flow and margins, as well as good downside protection. Strategy Highlights n 34-year history of conservative and disciplined investing. n Seven investment professionals with an average of 24 years of industry experience. The opportunity Stocks with a history of growing dividends tend to have lower payout ratios, leaving room for future dividend increases. As the chart below illustrates, higher-yielding stocks with high payout ratios have been trading near their historical highs, while lower dividend payout ratio stocks have been trading at nearly half their all-time highs. We believe lower-yielding, dividend paying stocks with growing dividends may offer higher potential value for investors Median NTM* for S&P 500 High and Low Payout Ratio Firms Huge premium for companies with high payout ratios Dec-76 Mar-78 Jun-79 Sep-80 Dec-81 Mar-83 Jun-84 Sep-85 Dec-86 Mar-88 Jun-89 Sep-90 Dec-91 Mar-93 Jun-94 Sep-95 Dec-96 Mar-98 Jum--99 Sep-00 Dec-01 Mar-03 Jun-04 Sep-05 Dec-06 Mar-08 Jun-09 Sep-10 Dec-11 Marc-13 Jun-14 Top Quintile (High Payout Ratios) Bottom Quintile (Low Payout Ratios) Source: Compustat, October 31, NTM*=next twelve months. 5

6 The Advantages of Growth Stocks The s Performers Strategy focuses on high-quality stocks, which are also historically inexpensive based on a variety of valuation metrics, including book value. We believe high-quality stocks are undervalued Low Quality vs. High Quality Price to Book Relative to Russell 1000 ( ) 6.0 Relative P/Book vs. Russell Source: BofA Merrill Lynch, as of April 17, A+ C&D To learn more about dividend growth stocks and how they can help provide stronger and more stable long-term total returns, please contact your SMA Sales Representative or view the US Performers Strategy fact sheet. 6

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