Why You Should Consider the US for Dividends

The S&P 500 index yields 2% - but a good US equity income fund manager can double that. So where can you find income across the pond?

Emma Wall 11 September, 2013 | 1:17PM
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It is no secret that the S&P 500 has significantly rallied since its lows in March 2009. In the first half of this year the index seemed to hit an all-new record high every week.

But the US can also be a source of income as well as growth, and well diversified income at that.

Historically, US companies favoured share buybacks as a way of getting rid of excess cash. But now companies across the board are rewarding shareholders in the form of dividend payments. 

More than 80% of the index currently pays out a dividend, the highest level in 14 years.  And they are offering income growth too.

There have been a staggering 270 dividend increases in the S&P 500 so far this year – with an average increase of 28%.

There are some concerns about whether the good times can continue in the US. The prospect of war with Syria, the end to quantitative easing and murmurings about a US debt ceiling could cause the index to falter. But Christian Preussner, portfolio manager of the JP Morgan US Equity Income fund said that despite these concerns he does not see short-term market fears as catalysts for a market correction.

“We think the underlying strength of continued economic growth in the US suggests stocks continue their upward trajectory,” he said. “Headlines have virtually ignored the progress made in the US economic recovery.”

Certainly GDP figures and falling unemployment backs this up. House prices are also on the rise.

Preussner pointed out that the unemployment rate is now within 0.5% of the level at which Chairman Bernanke suggested they may end quantitative easing -  and within 1% of the Federal Reserve’s unemployment target where they may begin to consider raising interest rates.

Rebecca Young, manager of the Neptune US Income fund said that it is not just the US economy that looks strong – but the corporate sector itself too.

With strong fundamentals in the corporate sector, including high cash balances and solid earnings growth, dividend pay=outs not only look sustainable but also have room to grow,” she said.

“Whilst aggregate US dividend payments are at an all-time high, dividend pay-out ratios are approximately 30% below developed market peers suggesting that there is considerable scope for further growth.”

The main argument for US equities as a source of income is diversification.

UK equity income investors are often reliant on a small number of large dividend payers in just a few sectors – and UK income investors who’ve overlooked the US have missed out on some of the best market returns of recent years.

“The top-yielding companies in the UK market produce 59% of its income,” Preussner said. “Whereas an attractive yield can be found in virtually every sector of the S+P 500 and the 15 top-yielding companies in that index only account for 8% of the yield.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar