Q3 2018 Dividend Portfolio Letter

Alley Company Dividend Portfolio 2018 Q3 Letter

October 18, 2018

The storyline behind stock performance over the past several quarters has been a noticeable outperformance by "growth" stocks relative to "value" stocks. This trend continued in the third quarter, with the Russell 1000 Growth Index returning 9.17 percent compared to the Russell 1000 Value Index return of 5.70 percent. The differential on a year-to-date basis between the two benchmarks is even wider with a gap of 1,300 basis points in favor of "growth." The relative performance gap has caught the eye of many Wall Street strategists with some calling for a reversal of this trend.

Importantly, interest rates continued a gradual ascent this past quarter with the U.S. ten-year Treasury bond yielding 3.05 percent at the end of the quarter, a 20 basis point rise in its yield. Accelerating GDP growth and a marginal inflation uptick has put upward pressure on interest rates. Investors are currently grappling with the perceived negative impact of rising interest rates offset by the positive implication of the yield curve in the U.S. still being near the lowest levels in recorded history. As the chart below indicates, interest rates tend to move gradually over time and today's level of interest rates remain attractive for continued strong business activity.

Yield

16.00% 14.00% 12.00% 10.00%

8.00% 6.00% 4.00% 2.00% 0.00%

US 10 Year Treasury Bond Yield History

Source: Federal Reserve data and

Year

1900 1904 1908 1912 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Due to a strengthening global economy along with corporate tax reform in the U.S., corporate profits have been robust in 2018. Record profits have allowed for strong dividend growth with the S&P 500 registering an increase of 8.6 percent year-over-year in dividends as of September 30th, 2018.

Quarterly Performance Update

The Alley Company Dividend Portfolio outperformed the Russell 1000 Value Index in the quarter.

Top contributors and largest detractors from an individual holdings perspective in the quarter were:

Top Contributors

Apple (AAPL) Abbott Labs (ABT)

Merck (MRK)

Largest Detractors

BlackRock (BLK) Wells Fargo (WFC)

Chevron (CVX)

Top and bottom sectors during the quarter were:

Top Performing Sectors

Bottom Performing Sectors

Health Care (-)

Materials (-)

Communication Services (-)

Energy (-)

Industrials (+)

Real Estate (-)

(+) indicates that the portfolio is overweight this sector and (-) indicates that the portfolio is underweight this sector.

Dividend announcements among Alley Company Dividend Portfolio holdings during the quarter were:

Company

Accenture (ACN) Altria Group (MO) BlackRock (BLK) Broadridge Financial Solutions (BR) JPMorgan Chase (JPM) Lockheed Martin (LMT) Microsoft (MSFT) Union Pacific (UNP) Verizon Communications (VZ) Wells Fargo (WFC)

Dividend Change

+10% +14% +9% +33% +43% +10% +10% +10% +2% +10%

There were no new holdings added to the portfolio in the quarter, nor were any current holdings eliminated. The position size of RPM International (RPM) was trimmed during the quarter in favor of increasing the weight of Verizon Communications (VZ). RPM has performed well of late driven by the company embarking on a cost-efficiency program in order to drive more profits to the bottom line. Verizon's wireless business continues to perform well and new growth opportunities are emerging with the launch of 5G fixed home broadband service into four U.S. cities. This service is designed to compete head on with other broadband providers, namely cable companies.

Alley Company Dividend Portfolio

The investment philosophy of the Alley Company Dividend Portfolio focuses on striking the balance between attractive absolute dividend yield and strong dividend growth underpinned by solid company fundamentals of our portfolio holdings. We employ a bottom-up, research-driven process focused on the fundamentals of our portfolio holdings.

Alley Company, LLC

Alley Company is a boutique investment management firm that is dedicated to operating a discernible and disciplined investment philosophy and generating superior risk-adjusted investment returns. Alley Company was founded in 1998 and in 2006 established the Alley Company Dividend Portfolio to capitalize on investment opportunities in quality companies with strong dividend-paying cultures.

The Alley Company Quarterly discusses general developments, financial events in the news and investment principles. It is provided for information purposes only. It does not provide investment advice and is not an offer to sell a security or a solicitation of an offer, or a recommendation, to buy a security. The statements and opinions contained herein are solely those of Alley Company LLC and are based upon sources and data believed to be accurate and reliable. The Russell 1000 Value Index measures the performance of large- and mid-capitalization value sectors of the U.S. equity market. Additional information regarding Alley Company, LLC can be found by accessing the SEC's website at adviserinfo..

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