Sustainable Income

Sustainable Income StrategyApril 1, 2024 

Summitry’s Sustainable Income strategy produced strong returns in the first quarter of 2024, with a composite of client accounts delivering gains from dividends, interest, and capital appreciation of +7.8%, net after fees. It is important to note that returns from this strategy will ebb and flow over time, as do the stock and bond markets in which this strategy invests. The strategy benefitted from rising stock markets, while new concerns about the persistence of inflation weighed on the bond markets. Overall, our stock selection enabled us to outperform our equity benchmark, the S&P 500 Dividend Aristocrats, and our current bias toward shorter maturity fixed income exposures enabled us to outpace our bond benchmark, the Bloomberg Aggregate Bond Index during the first quarter. Relative to our blended benchmark comprised of the S&P 500 Dividend Aristocrats (70%) and the Bloomberg Aggregate Bond Index (30%), the Sustainable Income strategy outperformed by +341 basis points before fees and +308 basis points, net after fees. Individual client account performance varied around this composite average, reflecting their specific mix of stocks, bonds, preferred stocks, and bond ETF’s.  

Here is the record for the Sustainable Income Composite since inception (please see performance disclosure at end of this note)[1]. 

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


Dividend Growth 

Seven companies in the Sustainable Income portfolio increased their dividend in Q1, including: KMB (+3%), BAM (+19%), MMM (+1%), ETN (+9%), UPS (+1%), CSCO (+3%), TSM (+16%). 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 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. 

Q1 2024 Top Contributors 

  • Eaton Corp (ETN) returned +30.3% in Q1, as the company offered earnings ahead of Wall Street estimates and guided to low-double-digit earnings growth for 2024. Fourth quarter earnings were driven by revenue growth of 11% combined with operating margin improvement of +200 basis points versus the prior year. Management sited an acceleration of opportunities linked to the federal infrastructure programs and shift by manufacturers to onshoring of supply chains. During the first quarter of 2024, ETN’s board raised the company’s dividend to shareholders by 9%.  
  • Target (TGT) returned +25.2% in Q1. Following a strong Q4’23 performance, TGT reported earnings for its fiscal fourth quarter and full-year earnings guidance well ahead of Wall Street estimates, and the stock reacted favorably. While comparable-store sales remain weak in an uncertain consumer environment, TGT made substantial strides in solving its remaining supply chain issues, improving its inventory position, and controlling its costs. These productive actions were manifested in operating margin improvement of more than two percentage points versus the prior year’s fourth quarter.  
  • Caterpillar Inc. (CAT) produced a total return of +23.9% in Q1. The company’s strong profit report in the most recent quarter was driven mostly by margin improvements tied to robust pricing and manufacturing cost controls. While volume growth is expected to be weak for the remainder of 2024, management projects that pricing and cost trends will continue to drive robust growth in earnings and free cash flow.  

Q1 2024 Top Detractors 

  • United Parcel Service Inc. (UPS) declined -4.4% in Q1. The company’s earnings report in January failed to impress, as holiday-season revenue missed analyst expectations, and the company offered weak guidance for 2024. The significant increases in labor costs following UPS’s agreement with the Teamsters Union last summer have forced management to turn its attention to eliminating excess costs. The market also reacted poorly to comments from management that the industry has excess capacity to carry domestic parcels, which may pressure pricing for all market participants, including UPS.  
  • McDonald’s Corp (MCD) returned -4.3% in Q1. In the most recent quarterly report, the company showed strong comparable store sales across its owned and operated domestic and international restaurant base. Systemwide sales rose +6% and operating profit increased +14% versus the prior year. Share price weakness in March was likely due to a comment by management that lower-income customers were pulling back on purchases, potentially auguring a period of promotional pricing ahead. 
  • 3M Company (MMM) returned -1.0% in Q1. The company delivered mixed news during the quarter. Management’s forward earnings guidance, while ahead of analyst forecasts, was met with skepticism by Wall Street in January. The stock recovered early losses over the course of the quarter, with the market applauding the appointment of Bill Brown, former CEO of L3Harris, to become MMM’s new CEO. The company completed the spin-off of its health care unit on April 1st.  

Key Actions 

In March, we initiated a position in Carrier Global Corporation (CARR). Please see Summitry’s Q1’24 Quarterly Commentary for a detailed description of the company and our investment rationale. We felt that CARR would be a valuable addition to the Sustainable Income strategy because it produces a high-quality, stable earnings stream that comfortably supports a growing dividend. We expect low-double-digit earnings growth over the next five years and given the board’s policy of distributing approximately 30% of earnings to shareholders as a dividend, we think it’s reasonable to expect that CARR will meet our objective of producing dividend growth in excess of inflation. While it is one of the Sustainable Income portfolio’s lower yielding stocks today, at 1.3% current yield, we believe that future dividends will provide an attractive yield against our purchase price. 

We did not exit any of our positions in Q1.  

Income Securities 

The Sustainable Income portfolio has traditionally held approximately 30% of its assets in bonds and preferred stocks, whose primary purpose is to increase the overall portfolio yield rather than offer long-term appreciation potential. Nevertheless, in the short term these securities rise and fall in price, sometimes considerably, in reaction to changes in the interest rate environment. A rise in interest rates in the first quarter–signaling Wall Street views that progress on taming inflation has slowed–weighed on income securities in general, and particularly on longer-term issues. We do not know what the level of inflation will be as the year progresses but given the high importance of bringing inflation under control, we know that it is firmly on the minds of policy makers. Our bias will continue to be toward concentrating our exposures on the shorter end of the yield curve until we have greater confidence that inflation will be moving sustainably lower, or when “real” interest rates on long-term bonds (defined as the nominal yield minus the inflation rate), are high enough to offer us an attractive return. Given our increased use of bond ETFs (Exchanged Traded Funds) in client accounts, we can now be more nimble and quickly change our posture in response to market shifts, at least when compared to the less efficient trading markets for individual corporate, government, and municipal bonds. 


The Sustainable Income strategy has produced respectable returns in volatile markets and over a market cycle. Looking forward, in an interest rate environment that offers higher yields on fixed income and preferred securities than we have experienced for many years, Sustainable Income remains a good choice for the client who seeks growth of income over time and reduced portfolio volatility, while retaining some opportunity for capital appreciation. 


This article 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 securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. 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. 


[1] 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.