Sustainable Income

Sustainable Income Strategy – June 30, 2025

With the close of Q2, 2025, we celebrate the tenth anniversary of Summitry’s Sustainable Income strategy. With over $225 million in client assets committed to this strategy, Sustainable Income has become an important offering for the firm. It complements our other “Core” equity and fixed income strategies, as well as our “Explore” equity and alternative strategies. Together, these offerings allow us to create tailored solutions for clients seeking a combination of growth and income—the goal Sustainable Income is designed to deliver. We believe the long-term results presented in the table below demonstrate that the strategy has met our objectives, particularly when compared to our chosen benchmark.

In the second quarter of 2025, the Sustainable Income Composite delivered strong returns (+6.54% gross, +6.21% net), handily outperforming its blended benchmark, which lost ground during the period (-0.15%).

Individual client account performance varied around this composite average, reflecting their specific mix of stocks, bonds, preferred stocks, and bond ETFs. As always, we remind you that returns from this strategy and performance relative to our benchmark will ebb and flow over time, as do the stock and bond markets in which this strategy invests.

Here is the record for the Sustainable Income Composite since inception (please see performance disclosure at end of this note)[i].

* Blended Benchmark: 70% S&P 500 Dividend Aristocrats/30% Bloomberg Aggregate Bond Index

These strong results obscure the tremendous volatility that markets, and our portfolio, experienced during the second quarter. On April 2^nd, President Trump sent equity markets into a tailspin by announcing plans to apply shockingly high tariff rates to virtually all goods imported into the US. Many of our holdings with global supply chains saw a swift decline due to the exhaustive nature of the tariffs, leaving management teams scrambling for a mitigation strategy. The S&P 500 declined by more than –12% over the following four trading days. Meanwhile, hot wars continued to rage in Ukraine and the Middle East, culminating in Trump’s decision to bomb Iran’s nuclear facilities on June 21^st. Despite all this turmoil, markets rebounded sharply from their April lows, as the administration appears to walk back some of its tariff plans and pushed out deadlines to allow more time for negotiation with trading partners.

While we await clarity on the outcome of ongoing negotiations and ultimate tariff rates, we are preparing for more market volatility, as Trump’s trade policies are likely to ripple through the economy in unexpected ways. As for our current holdings, we believe the businesses we own are prepared to manage through most outcomes due to their strong competitive positioning, but it is unlikely any business will be completely immune in the near term. Our portfolio is well-diversified with varying exposures to the fluid tariff negotiations, which could help to dampen volatility in some scenarios.

Dividend Growth

Five companies in the Sustainable Income Portfolio increased their dividend in Q2, including: CSCO (+3%), JNJ (+5%), LVMUY (+6%), PG (+5%), UNVGY (+3%). No companies reduced their dividends during the quarter.

Of the many factors that we consider when selecting companies to own in the Sustainable Income portfolio, the capacity and commitment to pay sustainable and growing dividends are among the most important. The capacity to pay growing dividends is derived from earnings growth and strong balance sheets. The commitment comes from various company managements and boards of directors who choose to share surplus earnings with shareholders. Not every great company will pass through earnings in the form of a dividend, which is a reasonable choice if the earnings can be reinvested in the business in initiatives that promise high returns on investment. Those stocks will not qualify for the Sustainable Income strategy, but they may be held in other strategies managed by Summitry. But when a management team cannot redeploy cash in a manner that will generate a high return within the company’s operations, we would prefer they remit that cash to shareholders in the form of a dividend.  These are ideal stocks for Summitry’s Sustainable Income portfolio strategy.

Q2’25 Top Contributors

• Nintendo (NTDOY) returned +39.9% in Q2. Nintendo continues to benefit from excitement surrounding the launch of the company’s Switch 2 gaming console, which became the company’s fastest-selling console ever (3.5mm units sold in the first 4 days after launch). We expect strong demand for the new console, which includes better graphics performance, exclusive launch titles (including a new version of Mario Kart), and backwards compatibility with existing Switch titles. The original Switch was launched more than 8 years ago, so there is likely to be significant pent-up demand for a new console from the current installed base.
• Taiwan Semiconductor Manufacturing (TSM) returned +36.9% in Q2. TSMC continues to benefit from surging demand for semiconductors that power artificial intelligence globally. Revenue growth in local currency was greater than +40% year-over-year through the first five months of 2025, and we expect increasing demand for TSMC’s services to persist for several years. Additionally, TSMC’s hard earned monopoly position at the leading edge provides the company with pricing power to mitigate margin pressures from escalating fab construction and operating costs, a weaker US dollar, and any potential tariffs levied by the Trump administration on Taiwanese exports, or semiconductors more broadly.
• Microsoft (MSFT) Returned +32.7% in Q2. Microsoft continues to benefit from rapid adoption of AI, both by the company’s core customers and customers of OpenAI, since Microsoft Azure is the primary cloud platform powering OpenAI and ChatGPT. With cloud as the primary growth engine, consolidated operating profit grew by +18% over the prior year.

Q2’25 Top Detractors

• United Parcel Service (UPS) returned -18.3% in Q2. Package volumes declined globally as a result of the slowing consumer environment and the company’s planned divestiture of its low-margin Amazon business. This was further exacerbated by the April 2^nd tariff announcements, which had an immediate impact on goods imported into the United States. As discussed below, we exited our UPS position during the quarter.
• LVMH Moët Hennessy Louis Vuitton (LVMUY, LVMHF) returned -14.0% in Q2. The ongoing luxury hangover mostly continued in Q1, and tariff escalation could further weaken consumer spending and delay recovery. China, a key market for LVMH, continued to experience broad-based macroeconomic weakness. With that said, despite revenue declines and weaker margins, LVMH’s relatively high margins and strong balance sheet should allow the company to withstand and invest through most scenarios, which should position it for a strong recovery when consumer sentiment improves.
• Kimberly-Clark (KMB) returned -8.5% in Q2. Organic growth weakened as consumer price sensitivity and tariff uncertainty were meaningful overhangs on results. Management is in the early stages of a transformation to accelerate product innovation and improve supply chain efficiency. While we expect a challenging environment for Kimberly-Clark in the short-term, its strong balance sheet and cash generation should allow them to withstand most scenarios with the potential upside of faster growth and higher margins in the medium-term as a result of their aforementioned initiatives.

Fixed Income Securities

The Sustainable Income portfolio has traditionally held approximately 30% of its assets in bonds and similar securities that offer a fixed yield. Their primary purpose is to increase the overall portfolio yield rather than offer long-term appreciation potential.

Bonds performed reasonably well over the three months ending 6/30/25, but bond markets experienced some volatility in response to the same factors that impacted the equity markets during the quarter. The Federal Reserve maintained its target for the Fed Funds rate at 4.25%-4.50% amid uncertainty over the Trump Administration’s economic and trade policies. Longer-term bond yields rose and then receded during the quarter in reaction to changing investor perceptions of geopolitical and economic risk, as well as a weakening US dollar. By the quarter’s end, government bond yields were roughly where they began. Corporate credit spreads initially spiked in reaction to Trump’s Liberation Day announcement, but settled as the quarter evolved, ultimately rewarding patience for investors in strong corporate bonds.

We will likely continue to concentrate our exposures to relatively short and medium-term bonds for the present, as the markets do not provide a significant premium yield for extending to longer maturities, although we will be opportunistic as the yield environment changes.

Key Actions

United Parcel Service (UPS) Sale

While once an attractive business for the Sustainable Income portfolio, we’ve determined UPS is no longer a suitable investment given its deteriorating outlook and outsized dividend commitment. The company is facing several structural challenges, including declining demand driven by tariff uncertainty and an accelerated reduction in Amazon volumes. At the same time, competition, particularly from Amazon, and rising labor costs from a new union agreement have further compressed margins.

This combination of falling volumes and shrinking margins has significantly reduced the free cash available to support dividend payments. As a result, we see little potential for dividend growth in the near-term and believe the risk of a dividend cut is rising. Although UPS is attempting to offset these pressures by investing in its higher-margin opportunities such as its healthcare segment and implementing cost-cutting measures, we do not believe these efforts will be sufficient to meaningfully improve the company’s outlook.

Conclusion

The Sustainable Income strategy has produced respectable returns in volatile markets and over a market cycle. We believe Sustainable Income remains a good choice for clients who seek growth of income over time and reduced portfolio volatility, while retaining some opportunity for capital appreciation.

About Summitry’s Sustainable Income Strategy

Many clients ask us to address the tradeoff between their need for current income and desire for capital growth. Bonds alone are unlikely to generate sufficient returns to preserve purchasing power over the long-term, but stocks subject the investor to greater volatility. The power of long-term compounding of wealth provided by the equity markets can be lost if volatility compels clients to liquidate securities during market drawdowns. This concern typically grows more acute as clients age and time horizons compress.

To meet this challenge, we devised a portfolio strategy in 2015 that attempts to balance the need for reduced volatility with a desire for capital appreciation. Our solution is a diversified portfolio primarily consisting of blue-chip companies that pay regular and growing dividends out of surplus cash flow. We believe these companies generate earnings beyond what is needed to grow their businesses. This surplus allows management to raise their dividend payouts over time. We call this our Sustainable Income strategy. To learn more, we gave a behind-the-scenes look at our Sustainable Income strategy here.

Summitry’s Dividend Growth Strategy

Summitry’s Dividend Growth Strategy is comprised 100% of dividend-paying equities and is made available to clients who wish to have exposure to the income generation and total return opportunity that is offered from the equities held in the Sustainable Income strategy, but without the exposure to SI’s bond and preferred stock holdings. Your Financial Advisor can help you decide if this is a useful and appropriate strategy given your personal financial circumstances.

 

 

This commentary reflects the opinions of Summitry, LLC and is for informational purposes only. Nothing herein constitutes investment advice or any recommendation that any particular security, transaction, or strategy is suitable for any specific person. The securities identified do not represent all the securities purchased, sold, or recommended for client accounts. Past performance does not guarantee future returns. Investing involves risk.  The reader should not assume that an investment in the securities identified was or will be profitable. An index is a hypothetical portfolio of securities representing a particular market or market segment and is used as an indicator of the change in the securities market. Indexes are unmanaged, do not incur fees and expenses, and cannot be invested in directly.

 

[i] Sustainable Income Composite includes all Sustainable Income accounts with a long-term target of 70% investment in primarily U.S. dividend paying stocks and 30% investment in income producing securities which include bonds and/or ETFs, preferred securities, REITs and MLPs. The allocation among asset classes generally may vary around this long-term target by plus or minus 10 percentage points and we may hold cash balances. The primary objective of the strategy is to produce monthly income that grows at a rate faster than inflation through a portfolio principally invested in equities, and a secondary objective to participate in the long-term appreciation of the equity securities held. Bonds and preferred stocks are selected to add stability to the portfolio’s cash flow. Summitry employs a value-based investment strategy focusing on high-quality multi-national businesses that can be purchased at a discount to their estimate of intrinsic value. The benchmark for this composite is a blended benchmark consisting of 70% S&P 500 Dividend Aristocrats Index, and the Bloomberg Aggregate Bond index (30%) (Formerly Barclays Capital Aggregate Bond Index) and is rebalanced monthly. After March 31, 2020, the equity portion of the blended benchmark was replaced from the S&P 500 Index to the S&P 500 Dividend Aristocrats Index. Summitry believes this most closely represents the strategy pursued in the equity allocation. Anytime the individual components are shown, should be considered supplemental information.  The minimum account size for this composite is $250 thousand.

 

The U.S. Dollar is the currency used to express performance. Returns are presented net of management fees and include the reinvestment of all income. Net performance is calculated by reducing the gross performance by the model fee of 1.25% applied monthly. The inception and creation of the Sustainable Income Composite was on June 30, 2015.