Legg Mason : With Fixed Income Yields Tumbling to Zero Around the World, Dividend Funds Can be a Relatively Sound, Attractive Option for Investors Seeking Income

Madelyn McHugh mmchugh@leggmason.com (212) 805-6039

Feature Quality Companies, Growth Potential and Diversification

With U.S. equity markets near all-time highs, investors may have to lower expectations about how much more price appreciation they can achieve. ClearBridge Investments suggests that the best option may be high-quality, consistent-dividend-paying stocks.

"Our main concern continues to be sustainable global economic growth," reported ClearBridge Investments portfolio manager Michael Clarfeld. "The Brexit vote did not

help. Investors need income, and ultra-low or negative interest rates reflect a lack of good options."

"In this difficult environment, our focus is on providing investors with stable and hopefully even rising dividend fund options. We also try to diminish volatility by owning solid equity assets."

ClearBridge Investments believes a portfolio featuring high-quality companies that are proven, regular dividend payers can be a solid strategy for investors who seek both income and security. Fortunately, equity markets provide many quality dividend-paying stocks.

"Overall stock market valuations, while high, are not extreme compared to alternatives," Mr. Clarfeld said. "Dividends remain strong. We have been fortunate this year to have stocks and sectors that respond well to the need for dividends and dividend growth."

Characteristics of attractive dividend payers ClearBridge Investments looks for include: a solid, sustainable business model, so investors can predict what the business will look like in five, 10 or 20 years; good management teams; proper capital allocation by the

company; and adequate free cash flow. These companies can provide sustained and potentially rising dividends.

"I love companies that have histories of raising dividends on a regular basis," said ClearBridge Investments Co-Chief Investment Officer Hersh Cohen. "That's where we focus. We prefer companies that make products that tend to get used up, so they do not have to reinvent demand every quarter. So we prefer a consumer staple to an auto company as dividend payers: companies with sustainable businesses and recurrent revenues."

While dependent on very specific sets of criteria, these funds can serve many investor needs.

"At times you will lag a benchmark," Mr. Cohen said. "But your dividends can keep going up. When the markets are getting killed and investors panic, I can say, 'Not one of your companies cut their dividends today.' So you're diversified by stock, by sector, and the main thing is the ability to maintain and raise those dividends."

Some of these attractive companies are coming from non-traditional sectors.

"Technology was not a dividend-paying sector, but now some real blue chip technology companies are dividend raisers," Mr. Cohen observed. "In the last five years that's become a more popular theme, so we have a few of those. Big examples would be Microsoft, Intel and Texas Instruments, three stocks we have owned for a long time that are dividend raisers."

The ClearBridge Investments team believes dividend-oriented investors are best served by taking a long-term view and looking past short-term volatility.

"Our operating thesis has been that equity markets will trade in a narrow range, supported by ultra-low interest rates and capped by full valuations," Mr. Clarfeld explained. "The U.S. Federal Reserve will remain highly accommodative. In this environment, if we start seeing prolonged indiscriminate selling, opportunities will be created. We use cash as an opportunity tool."

Fitting strong dividend products into an investor portfolio also can help with risk management.

"Dividend stocks can provide a nice rising stream of income that is not available elsewhere without sacrificing quality," Mr. Cohen said. "To get more income you have to take a little more risk, or in some cases a lot more risk."

This helps explain why the ClearBridge Investments team is committed to its dividend strategy.

"Generally speaking, companies do a good job of earning a proper return on equity," Mr. Cohen said. "When investors become nervous, I like to tell them, 'In any one year dividends can go up, earnings can go up, and the market can go way down, like in 2008. But over 20 to 30 years, those graphs of dividends earnings and rising stock prices? They are probably going to superimpose."

That dividends remain strong is encouraging, although macroeconomic factors add uncertainty.

"The U.S. economy is being aided by strength in home sales, which has a good multiplier effect," Mr. Clarfeld said. "We think auto sales will slow from their torrid pace. Banks seem to be well-capitalized and well-positioned should markets become more volatile. For the economy and stock market to achieve earnings growth, companies need better revenue growth. We continue to be frustrated by this inability to generate substantial increases in revenues."

It also points out the need for diversification, which high-dividend products often offer.

"We own a package of companies, diversified by sector and company, that we believe have sustainable enough dividends," Mr. Cohen said. "For us, no one stock will ever be more than three percent [of portfolios]. No matter how much we might like energy or pharma, say, we will not go to 30 percent of it. That might sacrifice a bit on the upside, but our portfolios are well diversified."

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Michael Clarfeld is a member of the ClearBridge Investments income solutions team and co- manages the Dividend Strategy and Energy MLP strategies. He joined the firm in 2006 as a research analyst and was named a portfolio manager in 2009. Mr. Clarfeld has 15 years of investment industry experience. Prior to joining ClearBridge, he served as an equity analyst at Hygrove Partners and was a financial analyst at Goldman Sachs. A member of the CFA Institute and the New York Society of Security Analysts, Mr. Clarfeld received a B.A. in history from Duke University.

Hersh Cohen is Co-Chief Investment Officer and Portfolio Manager for the ClearBridge Investments income solutions team that manages the Dividend Strategy products, in addition to managing private portfolios and retirement funds. A member of the ClearBridge Investments Management and Risk Committees, Mr. Cohen began his career with a predecessor organization in 1969 as a portfolio manager and has more than 45 years of industry experience. He was appointed CIO of ClearBridge's predecessor firm in 2004. Mr. Cohen received a B.A. in 1962 from

Western Reserve University (now Case Western Reserve University), and earned a Ph.D. in Psychology from Tufts University in 1966.

ClearBridge Investments is a well-established global investment manager with $105.4 billion in assets under management as of June 30, 2016. With a legacy dating back over 50 years, the firm's long-tenured portfolio managers and fundamental research team focus on building equity portfolios for clients who seek income, high active share or low volatility solutions. Owned by Legg Mason, ClearBridge Investments operates with investment independence from headquarters in New York and offices in Baltimore, San Francisco and Wilmington.

Legg Mason is a global asset management firm with $737 billion in assets under management as of August 31, 2016. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).

The Federal Reserve Board ("Fed") is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

All investments involve risk, including loss of principal. Past performance is no guarantee of future results.

Equity securities are subject to price fluctuation and possible loss of principal. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Dividends may fluctuate and a company may reduce or eliminate its dividend at any time.

Fixed-income securities involve interest rate, credit, inflation, and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed-income securities falls. U.S. Treasuries are direct debt obligations issued and

back ed by the "full faith and c redit" of the U.S. government. Th e U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity.

The views expressed are those of the portfolio managers as of the date indicated, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice.

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