The document provides an overview of the Putnam Equity Income Fund's performance in Q2 2013, highlighting a beneficial pro-cyclical bias favoring cyclical stocks over defensive sectors amid economic improvement. Despite a positive sentiment and strong performance in certain sectors, the outlook for equities is cautious due to rising interest rates and market volatility. A significant expansion in the pool of dividend-paying companies, including those from traditionally non-dividend sectors like technology, reflects ongoing changes in the investment landscape.

1. PUTNAM INVESTMENTS | putnam.com
Key takeaways
•The portfolio’s pro-cyclical bias was beneficial as we continued to see a shift in
favor of cyclical stocks over defensive sectors.
•Over the past few years, we have seen a significant expansion in the universe of
companies with the ability and willingness to pay a dividend.
•Given the speed with which stocks have advanced and the introduction of
increased interest-rate volatility, I would describe my outlook for equities as
cautious for the short term.
What can you tell us about conditions in the second quarter and
performance for the portfolio?
Both the U.S. equity market and the fund fared well in the second quarter. Within
the fund’s portfolio, sectors that worked well were industrials, financials, and
materials, while health-care, energy, and information technology holdings were
weaker.
The portfolio’s pro-cyclical bias was beneficial as we continued to see a shift
in favor of cyclical stocks over defensive sectors. This, I believe, is a reflection of
changing macroeconomic conditions. In the United States in particular, we have
seen vast improvement on the employment front and in the housing market. This
has boosted sentiment and encouraged more risk-taking on the part of equity
investors. In terms of portfolio construction, we were able to focus on these
opportunities in cyclical stocks without sacrificing yield potential.
Another interesting aspect of the second quarter involved the importance of
cash flow to company performance. Companies with high free-cash-flow yields
have outperformed those with weaker free-cash-flow yields. At the same time,
companies with high dividend yields have underperformed. As cash flow became
preferred over dividend yield, cyclical sectors benefited, including industrials,
financials, and information technology. Among the highest-dividend-yielding
stocks, those in defensive sectors — consumer staples, utilities, and telecom —
were weakest.
Assistant Portfolio Manager
Walter D. Scully, CPA
(industry since 1990)
Q2 | 2013 » Putnam Equity Income Fund Q&A
Dividend-paying stocks rise
to the challenge of higher
interest rates
Darren A. Jaroch, CFA
Portfolio Manager

2. Q2 2013 | Dividend-paying stocks rise to the challenge of higher interest rates
2
As investors begin to anticipate rising interest
rates, do you expect demand to weaken further
for dividend-paying stocks? Which sectors are
typically most affected by rising rates?
A rise in interest rates will likely taper demand for
dividend-paying stocks. The high-yielding sectors — the
so-called “bond proxies” — will be most affected by
the initial moves, particularly REITs and utilities stocks.
Looking ahead, however, it is important to consider the
reason for rising rates, which is broadening improve-
ment in the economy. This is good for equities and
therefore, as I view stocks in the context of a diversified
portfolio that also seeks capital appreciation over time,
my outlook is bullish.
Another reason you’ve cited for your
optimism is the wider range of opportunities
among dividend-paying companies. Can you
tell us more about this?
Historically, dividend-paying stocks were almost exclu-
sively those in defensive and “bond-like” sectors such as
telecom and utilities. Over the past few years, however,
we have seen a significant expansion in the universe of
companies with dividend-paying proclivity — the ability
and the willingness to return cash to shareholders.
Currently, approximately 80% of S&P 500 compa-
nies are paying dividends. And, even more important,
the practice has extended well beyond the defensive
sectors. For example, over the past few quarters,
many information technology companies, a group that
traditionally withheld cash for reinvestment or other
purposes, have initiated or increased dividends. In fact,
I would estimate this trend is occurring in 6 or 7 of the 10
S&P 500 sectors — even in this rising-rate environment.
There are no guarantees that a company will continue to
pay dividends.
As we enter the second half of 2013, what is
your outlook?
As an equity investor, I have been pleased with the
performance of the market and the improvement in
investor sentiment. However, given the speed with
which stocks have advanced and the introduction of
increased interest-rate volatility, I would describe my
outlook as cautious for the short term.
We are seeing legitimate economic expansion in
the United States, although it is slower than expected,
and investors are less jittery about risks that had been
distracting them for a while, such as slowing growth in
China, recession in Europe, and U.S. government budget
challenges. One notable risk that remains, in my view, is
the possibility of a dramatic spike in interest rates, partic-
ularly if the Federal Reserve communicates its plans for
tapering bond-buying programs in a way that unnerves
investors. I view this as a short-term risk, however, and
my long-term view remains constructive for equity
investing. While volatility for stocks is certainly possible
in the coming months, it is important to remember that
retrenchment can be healthy for the market.
Putnam Equity Income Fund (PEYAX)
Annualized total return performance as of June 30, 2013
Class A shares
(inception 6/15/77)
Before
sales
charge
After
sales
charge
Russell
1000
Value
Index
Last quarter 3.18% -2.76% 3.20%
1 year 29.24 21.81 25.32
3 years 20.00 17.65 18.51
5 years 9.07 7.79 6.67
10 years 8.73 8.09 7.79
Life of fund 10.15 9.97 —
Total expense ratio: 1.09%
Returns for periods less than one year are not annualized.
Current performance may be lower or higher than the
quoted past performance, which cannot guarantee
future results. Share price, principal value, and return
will vary, and you may have a gain or a loss when you
sell your shares. Performance of class A shares before
sales charge assumes reinvestment of distributions and
does not account for taxes. After-sales-charge returns
reflect a maximum 5.75% load. The fund’s expense
ratio is based on the most recent prospectus and is
subject to change. To obtain the most recent month-end
performance, visit putnam.com.
The Russell 1000 Value Index is an unmanaged index
of those companies in the large-cap Russell 1000 Index
chosen for their value orientation. You cannot invest
directly in an index.

3. Q2 2013 | Dividend-paying stocks rise to the challenge of higher interest rates
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The views and opinions expressed are those of Darren A. Jaroch, CFA, Portfolio Manager, as of June 30, 2013. They are
subject to change with market conditions and are not meant as investment advice.
Consider these risks before investing: Value stocks may fail to rebound, and the market may not favor value-style
investing. Income provided by the fund may be reduced by changes in the dividend policies of, and the capital resources
available at, the companies in which the fund invests. Stock prices may fall or fail to rise over time for several reasons,
including general financial market conditions and factors related to a specific issuer or industry. You can lose money by
investing in the fund.
Request a prospectus or summary prospectus from your financial representative or by calling 1-800-225-1581.
The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read
and consider carefully before investing.
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