Equities grinded higher amidst strong earnings growth, resilient consumer spending, and looser monetary policy.
Fixed income markets signaled appropriate monetary policy, despite labor market concerns.
Market conditions favor re-balancing exposure into asset classes such as dividend paying equities.
Fourth Quarter Update
Global equity markets grinded higher in the quarter as the Federal Reserve cut interest rates, inflation moderated, and corporate earnings exceeded expectations. Notably, cyclical equities (such as small-cap value equities) contributed to the broader market rally, which speaks to economic resiliency despite labor market concerns.
Short-term interest rates have declined more than long-term interest rates, which caused the yield curve to become positively sloped. A positive yield curve generally implies monetary policy is in an appropriate spot, low risk of a recession, and moderate inflation. Additionally, a positively sloped yield curve is constructive for bank lending, which drove the economic-sensitive financials sector to all-time highs [1].
We believe Wall Street forecasts are still too low relative to economic activity. For instance, the Federal Reserve GDPNow prediction for fourth quarter real GDP growth is 2.7%, significantly higher than Wall Street’s average consensus of below 1.0% [2]. Our constructive view on economic conditions was tested throughout 2025, however our base case remains for economic momentum to continue into 2026.
Buy Straw Hats in Winter: The Case for Dividend Investing
Buy straw hats in winter is a famous quote attributed to 19th century investor, Russell Sage. Purchasing assets that are out of favor, cheap, and in low demand can yield lucrative results.
While dividend equities have been a recent underperformer, we have long-term conviction in companies that both pay and grow their dividends sustainably.
Recent and Historical Performance
Equities that have a history of dividend growth and higher dividend yields have recently underperformed companies with low dividend yields.
Since 1973, S&P 500 companies that initiate, grow, and pay dividends have outperformed those that do not pay dividends, and especially those that cut their dividends. The outperformance has also come with significantly less risk to the investor.
A Buying Opportunity for Dividend Stocks Today?
The opportunity set to buy dividend equities is compelling. The recent outperformance of low-dividend yielding equities versus high-dividend yielding equities is unprecedented despite historical outperformance of high-dividend yielding equities.
Mean reversion to historical levels of outperformance would result in high-dividend yielding equities outperforming by roughly 3.8% per annum on a long-term basis [4].
The current valuation of high-dividend yielding equities versus low-dividend yielding equities is favorable for mean reversion.
The opportunity set in dividend investing is also not limited to domestic equities. Our positive outlook on overseas equities, as noted in our 3rd Quarter 2024 Market Commentary, is supported by the generous dividend yield differential between domestic and global equities [5].
Enhance Long-Term Performance: Reinvest Dividends
Investors that reinvest dividends can unlock the potential of compounded growth over the long-term. For example, a hypothetical $100 investment in the S&P 500 from 1940 through 2024, with and without dividend reinvestment, is noteworthy.
We regularly assess client cash flow needs. For clients without near-term needs, we reinvest dividend payments where appropriate.
Important Risk with Dividend Investing
Dividend investing does not come without risk. Companies that cut or eliminate dividends have historically produced poor returns and excess risk. Often, an abnormally high dividend yield is a sign of balance sheet stress and a potential for a dividend cut.
A strategy that can reduce the risk of dividend cuts is active management. Actively avoiding companies that have concerns around their dividend policy and focusing on companies with healthy balance sheets and potential for dividend appreciation can reduce risk as well as increase total return and income generation potential.
Parting Thoughts
As we look ahead to 2026, we believe the investment environment is likely to present meaningful opportunities for disciplined rebalancing and thoughtful portfolio positioning. Market leadership has been narrow in recent years, yet periods like this have historically rewarded investors willing to look beyond what has recently performed best and toward areas where valuations and fundamentals are more compelling.
In a setting where interest rates are declining and income from traditional fixed income is becoming less attractive, dividends can serve as an important and flexible tool. Dividend-paying companies have the potential to provide reliable income, downside resilience, and long-term total return, particularly when dividends are growing and reinvested over time. Importantly, dividend strategies are not solely about income. They can also play a meaningful role in managing risk and enhancing portfolio durability across market cycles.
As always, our focus remains on aligning portfolios with each client’s long-term objectives, cash flow needs, and tolerance for risk. We remain committed to active oversight, prudent rebalancing, and positioning portfolios to navigate both opportunities and uncertainties ahead.
We appreciate the trust you place in us, and we look forward to guiding you through the year ahead with clarity, discipline, and perspective.
Sincerely,
The RISE Team
Footnotes
[1] Data is per Federal Reserve Bank of St. Louis as of December 2025.
[2] Data is per Atlanta Fed GDPNow as of January 2026.
[3] Average Annual Returns and Volatility by Dividend Policy in the S&P 500 Index (1973-2024) from Ned Davis research and Hartford Funds, March 2025.
[4] As of September 2025. Graph is the 20-year annualized return of the highest 20% of stocks by dividend yield minus that of the lowest 20% of stocks by dividend yield. Data is from Federated Hermes and Ken French Data Library.
[5] Data is per Federated Hermes as of September 2025.
Disclosure
RISE Investment Management, LLC ("RISE" or "RISE Investments") is an investment adviser registered under the Investment Advisers Act of 1940. Registration of an investment adviser does not imply any level of skill or training. This publication is solely for informational purposes and past performance is not indicative of future results. Any description of products, services, and performance results of RISE contained in this publication are not an offering or a solicitation of any kind. No advice may be rendered by RISE Investments unless a client service agreement is in place. Advisory services are only offered to clients or prospective clients where RISE Investments and its representatives are properly licensed or exempt from licensure. All of the information in this publication is believed to be accurate and correct as the date set forth. RISE does not have or accept responsibility or an obligation to update such information. This article is not a substitute for legal or tax advice from your professional legal or tax advisor.