The Case for Dividend Growth: Harbor Dividend Growth Leaders ETF (GDIV)

Dividend growth investing focuses on companies with the potential to increase dividend payments. (While often grouped together, this approach differs from dividend yield investing which focuses on companies with high, rather than growing, dividend yields). The combination of dividend focus, and growth orientation may allow investors to participate in up markets while mitigating risk during down markets, and help investors maintain purchasing power amidst high inflationary environments.

Potential Benefits of Dividend Growth Investing

Income Generation	High-Quality Equity Exposure	Enhanced Risk-adjusted Performance
Dividend growth strategies focus on companies with sustainable and growing dividends. For investors, this means outsized and growing income potential.	Companies that have the ability to continually increase their dividend distributions are typically supported by strong earnings growth. They also tend to be well capitalized with strong revenue streams and free cash flows.	Dividends have historically played an important role in total return1. In down and volatile markets, distributions can help buoy total returns. This may help mitigate downside risk with the added benefit of upside participation.

Dividend Contribution to Total Return
	Price Pct. Change	Dividend Contribution	Total Return	Dividends Pct. of TR	Avg. Payout Ratio
1930s	-41.9%	56.0%	14.1%	100.0	90.1
1940s	34.5%	100.1%	134.6%	74.4	59.4
1950s	257.3%	180.3%	437.7%	41.2	54.6
1960s	53.7%	54.2%	107.9%	50.2	56.0
1970s	17.2%	59.1%	76.4%	77.4	45.5
1980s	227.4%	143.1%	370.5%	38.6	48.6
1990s	315.7%	115.7%	431.5%	26.8	47.6
2000s	-24.1%	15.0%	-9.1%	100.0	35.3
2010s	189.7%	66.9%	256.7%	26.1	35.2
2020s	18.8%	5.9%	24.8%	24.0	37.0
Average	114.4%	87.8%	202.2%	59.4	52.5
Source: Strategas Research Partners as of 12/31/22. S&P index inception date is 1928. Past performance is no guarantee of future results.

Dividend Growers vs. Dividend Yielders
It’s important to make the distinction between these two strategy types. While dividend growth strategies are typically characterized by higher-quality companies that are expected to increase their dividends over time, dividend yield strategies can be very different from a portfolio composition perspective. Dividend yield strategies often target and weight their portfolios based solely on dividend yield. Due to its calculation (annual dividends per share / current price per share), portfolio holding companies could simply be high yielding because of their higher dividends, but this may also be because of falling stock prices. In the latter case, these stocks could be considered value traps. These strategies are also often heavily weighted towards bond proxy sectors like utilities and consumer staples, making them more susceptible to the negative effects of rising interest rates.

The Harbor Dividend Growth Leaders ETF (GDIV)

We believe GDIV offers several advantages that make it particularly appealing for gaining access to dividend growth leaders across the market cap spectrum. GDIV is actively managed and subadvised by Westfield Capital, a specialist manager that brings a fundamental growth mindset towards dividend investing.

• Income & Growth Potential:
  The investment team seeks to invest in companies with growing dividend streams with equity upside participation during periods of market advances and improved downside support during market declines.
• Experienced & Tenured Team:
  Continuity and experience of senior team ensures a repeatable process over time. The portfolio manager is supported by career sector analysts with deep domain expertise across the capitalization spectrum.
• Growth-at-a-Reasonable-Price:
  Westfield employs a Growth-at-a-Reasonable-Price (GARP) investment style by seeking to invest in companies with underappreciated earnings growth trading at reasonable valuations, believing stock prices will ultimately follow earnings growth.

Why Harbor Dividend Growth Leaders ETF (GDIV) Now?

Within a backdrop of tighter financial conditions and slower economic growth, many investors remain concerned about the implications of potential recession in 2023. Stocks with a history of dividend growth have performed relatively well during contractionary phases of the economic cycle and could present a compelling investment opportunity in today’s uncertain and volatile environment.

As an example, the chart shows GDIV’s rolling 1YR excess returns versus the broad market (S&P 500 Index) plotted alongside the ISM Manufacturing Index over the past five years. These measures have exhibited a correlation of -0.57 to one another. This means that as manufacturing activity has deteriorated, GDIV’s excess returns have generally strengthened and vice versa.

Average Annual Performance as of 3/31/2022	1 Yr.	5 Yr.	10 Yr.	Inception Date
Harbor Dividend Growth Leaders ETF (NAV)	-6.68%	10.99%	10.33%	04/30/10
Harbor Dividend Growth Leaders ETF (Market)	-6.60%	11.01%	10.34%	04/30/10
S&P 500 Index	-7.73%	11.19%	12.24%	04/30/10
Gross Expense Ratio 0.50%

For standardized Performance click here www.harborcapital.com/etf/GDIV

Performance data shown represents past performance and is no guarantee of future results. Past performance is net of management fees and expenses and reflects reinvested dividends and distributions. Past performance reflects the beneficial effect of any expense waivers or reimbursements, without which returns would have been lower. Investment returns and principal value will fluctuate and when redeemed may be worth more or less than their original cost. Returns for periods less than one year are not annualized. Current performance may be higher or lower and is available through the most recent month end at harborcapital.com or by calling 800-422-1050.

Manufacturing activity appears in a state of weakening as concerns of recession continue to intensify. If this inverse relationship continues to hold true, GDIV’s emphasis on quality businesses with dividend appreciation profiles appears well positioned for the potentially challenging economic conditions ahead.

Taking an Active Approach

An environment of enhanced volatility and wider dispersion provides greater opportunity for active management to outperform. We believe dividend growth investors should take an active approach and leverage a skilled manager to unlock value and navigate uncertain markets.

Within the dividend growth space, many strategies and managers may rely on strict rules pertaining to dividend growth duration, as well as hard coded quantitative screening criteria. Conversely, Westfield Capital believes in-depth fundamental research is critical in terms of getting to know management teams and assessing their commitments to paying and increasing dividends. As such, GDIV may invest in companies that recently reinstated dividends with strong management commitment to growing them over time. This enables an expanded opportunity set versus asset class convention given GDIV’s more active and fundamental approach in uncovering opportunities within the dividend growth space.

Portfolio Implementation

Dividend growth strategies such as GDIV can be used in a variety of ways within a portfolio, most notably as a core equity strategic holding, a fixed income alternative or a tactical overweight.

One potential benefit of adding dividend growth to a portfolio is its diversification qualities. In the example below, the correlation of excess returns versus the broad market (S&P 500) between growth and dividend growth equities has been negative over the past 10 years (-0.34). Conversely, the correlation of excess returns between value and high dividend equities has been positive and relatively high (0.70). For clients seeking only one dividend-oriented strategy for inclusion within a diversified portfolio, dividend growth is likely a stronger diversifier.

Explore GDIV
Harbor Dividend Growth Leaders ETF (GDIV)
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Free cash flow represents the cash a company can generate after accounting for capital expenditures needed to maintain or maximize its asset base.

The S&P 500 Index is an unmanaged index generally representative of the U.S. market for large capitalization equities. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

The ISM manufacturing index is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

Duration is a commonly used measure of the sensitivity of the price of a debt security, or the aggregate market value of a portfolio of debt securities, to change in interest rates. Securities with a longer duration are more sensitive to changes in interest rates and generally have more volatile prices than securities of comparable quality with a shorter duration.

Important Information

Investors should carefully consider the investment objectives, risks, charges and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborcapital.com or call 800-422-1050. Read it carefully before investing.

ETF performance prior to 5/23/22 is attributable to the Westfield Capital Dividend Growth Mutual Fund, Institutional Share class and/or Westfields private investment vehicle. The historical NAV of the predecessor are used for both NAV and Market Offer Price performance from inception to ETF listing date. Performance periods since GDIV listing date may contain NAV and MOP data of both the newly formed ETF and the predecessor fund performance. Please refer to the Fund prospectus for further details.

Expense ratio information is as of the Fund's current prospectus, as supplemented Gross expenses are the Fund's total annual operating expense

All investments involve risk including the possible loss of principal. There is no guarantee that the investment objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. At times, a growth investing style may be out of favor with investors which could cause growth securities to underperform value or other equity securities. Since the Fund may hold foreign securities, it may be subject to greater risks than funds invested only in the U.S. These risks are more severe for securities of issuers in emerging market regions. A non-diversified Fund may invest a greater percentage of its assets in securities of a single issuer, and/or invest in a relatively small number of issuers, it is more susceptible to risks associated with a single economic, political or regulatory occurrence than a more diversified portfolio.

Investing involves risk, principal loss is possible. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. The ETF is new and has limited operating history to judge.

The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals. They may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice.

Westfield Capital Management, L.P. is the subadvisor for the Harbor Dividend Growth Leaders ETF

Foreside Fund Services, LLC is the Distributor of the Harbor ETFs.

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