Sustainable Income

Sustainable Income Strategy – September 30, 2025

U.S. equities performed well in Q3 2025, with the S&P 500 up by +7.7%. However, the recent artificial intelligence race has captivated investors, skewing returns toward technology and away from traditional dividend-paying equities. Fixed income returns were strong as bond prices benefitted from the Federal Reserve’s decision to cut interest rates in September. Against this backdrop, Summitry’s Sustainable Income strategy produced a return of +2.2%, bringing year to date returns to +8.9%, net after fees. While the Sustainable Income Composite did modestly underperform its blended benchmark in Q3, it has outperformed in every other period.

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

Dividend Growth

Five companies in the Sustainable Income portfolio increased their dividend in Q3, including: CAT (+7.1%), LOW (+4.3%), TGT (+1.8%), USB (+4.0%), and WFC (+12.5%). No companies reduced their dividend 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.

Q3’25 Top Contributors

• Taiwan Semiconductor Manufacturing (TSM) returned +23.3% in Q3. TSM continues to perform well from strong global demand for semiconductors that enable artificial intelligence. Revenue in local currency grew more than 36% year over year through the first nine months of 2025, and we expect robust demand for TSMC’s advanced manufacturing capacity to remain for years to come. The company’s dominant position at the leading edge gives it meaningful pricing power, helping offset rising fabrication and operating costs, a weaker U.S. dollar, and potential tariffs on Taiwanese exports or semiconductors under a Trump administration.
• Caterpillar (CAT) returned +23.3% in Q3. CAT has had to navigate several headwinds this year, including the impact of tariffs on business confidence and slowing housing demand. However, CAT’s performance rebounded strongly since April on its strong execution and diversified end market exposures. While its Construction Industries segment remain negative, its Energy and Transportation segment has seen strong demand in the face of the energy infrastructure buildout to power AI. In their Q2 report, CAT’s overall volumes turned positive, marking the first time since Q3’23.
• Johnson & Johnson (JNJ) returned +22.3% in Q3. Despite the patent expiration of a key drug in Stelara, which saw revenues decline over 40% several other brands grew double digits, including Darzalex (+23%) and Tremfya (+31%), enabling the Innovative Medicine segment to grow +2.4% organically. Its MedTech segment grew 4.1% organically. Their stronger-than-expected performance prompted management to raise their full-year outlook. Additionally, it appears JNJ will be able to avoid sectoral tariffs announced by the Trump administration and this added clarity lifted investor concern on the sector. We continue to believe JNJ will benefit from its diversified portfolio, scale, and resilient businesses over the long term.

Q3’25 Top Detractors

• Carrier Global (CARR) returned -18.2% in Q3. CARR saw a sudden decline in US Residential order volumes due to increased concern about the health of consumer spending by its distributors. It appears more households are electing to delay replacement of its HVAC units in favor of repairs in the interim. While this came as a surprise to the market, we believe this headwind will prove temporary in nature. Moreover, CARR has seen strong growth in its Commercial segment, benefiting from the explosive demand for Data Centers.
• Universal Music Group (UNVGY) returned -11.9% in Q3. We think Universal Music Group’s (UMG) recent share price weakness is most likely due to uncertainty following Cyrille Bolloré’s resignation from the Board of Directors in July. French regulators have required Bolloré to make a public takeover offer to Vivendi’s minority shareholders, leading to speculation that he may fund part of the offer by selling part of the roughly 20% stake in UMG held by Bolloré and related entities. We do not believe this dynamic will have material impact on the fundamental outlook for UMG’s business. Earlier this year, UMG renegotiated its agreements with Spotify and other distributors, so we expect pricing will provide a tailwind for growth in the coming quarters.
• Nintendo (NTDOY) returned -10.2% in Q3. Nintendo’s Switch 2 launch was highly successful, with 5.8 million units sold and revenues up 132% year over year in the company’s fiscal first quarter. Following a +39.9% gain in Q2, NTDOY shares ended Q3 up +47.4% year-to-date, suggesting that it may be suffering from its prior success.

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 well in the third quarter with the Bloomberg US Aggregate up about +2.0%. Driving this performance was the Federal Reserve’s decision to cut interest rates to 4.00% – 4.25% from 4.25% – 4.50%. While inflation still remains above the Federal Reserve’s target of 2%, weaker than expected jobs data ultimately prompted the change. The decrease in the Federal Funds Rate caused bond yields to fall, particularly in short-term Treasuries. Credit spreads between corporate investment grade bonds and Treasuries tightened relative to Q2 as investors risk perceptions remained favorable amid AI optimism and recent trade deal announcements.

Key Actions

In August, we sold our 3.5% position in Lockheed Martin (LMT) and initiated a 3% position in Rentokil Initial (RTO). The decision to exit LMT reflects persistent execution issues, including two recent losses of $1.7B and $1.6B tied to cost overruns in classified programs. These setbacks, combined with what may be structural shifts in defense spending toward lighter, lower-cost systems such as drones and missiles, have eroded our confidence in Lockheed’s positioning.

We redeployed capital into UK-based Rentokil Initial, the world’s largest pest control company, which operates what we see as a recurring, resilient business. While Rentokil has struggled to integrate its 2022 acquisition of Terminix, recent operational adjustments suggest progress, and we believe its challenges are fixable by the end of next year. With multiple potential catalysts ahead, including improved U.S. pest control performance, a possible U.S. re-listing, and divestiture of non-core assets, we view RTO’s current valuation as an attractive long-term opportunity. If the turnaround is successful, RTO’s persistent and durable growth characteristics combined with a demonstrated willingness by management to pay dividends could make it an ideal Sustainable Income candidate.

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.