Introduction
The Henderson Global Dividend Index reveals that US firms upped their dividends at an “astonishing pace” in the third quarter of 2015, and points out almost every sector witnessed higher payouts. Dividends rose 23.4 per cent to $107.9bn (£73bn) in the three months to September 30.
This figure was boosted by a special payment of $9.8bn from food group Kraft following its merger with Heinz, though the index notes this was the seventh consecutive quarter of double-digit increases in US payouts.
Alex Crooke, head of global equity income at Henderson Global Investors, points out: “Developed markets are seeing the best growth as their financial sectors heal and consumers become more confident. The US is far ahead of the curve, propelling dividends forward at breakneck speed.”
The only two sectors that failed to increase payouts in the third quarter were mining and tobacco. Many miners cut dividends as commodity prices continued to decline.
There are nine funds that offer exposure to US equity income, data from FE Analytics shows. Only three of these vehicles have a 10-year track record, with the Jupiter North American Income fund performing the best in that period, delivering 132.3 per cent to December 17 2015.
The JPM US Equity Income fund is the top performing of the five funds with a five-year record having delivered 79.9 per cent, beating the Investment Association (IA) North America sector average return of 71.3 per cent.
Now that the US Federal Reserve has begun tightening monetary policy, with a 25 basis point increase in its interest rate announced in December, what impact is this likely to have on dividends?
Neptune US Income fund manager James Hackman says: “The first interest rate hike since 2006 ends a period of zero interest rates and accommodative policy, during which businesses that should have failed have not. The pressure will be gradually turned up on those businesses that have not fixed their balance sheets during this period and they [are] likely to fail.”
But Rathbones asset allocation strategist Edward Smith observes: “Historically, global equity markets tend to do well for at least a year after the Fed sets off on a rate-rise cycle. Even in 1994, when [former Fed chairman] Alan Greenspan surprised investors with several rapid unheralded hikes, the S&P 500 closed higher a year later [although other countries’ bourses fared worse].”
Mr Smith is far more optimistic about the prospect for dividend payouts, noting: “Corporate cash piles have been growing in the past few years as companies refuse to invest.
“Our research shows firms usually start returning capital about two months after Fed rate hikes. This may be driven by managers looking to put money to work before the cost of capital eclipses the potential returns.
“Those firms with the ability to grow dividends and continue to buy back shares could be rewarded by investors.”
THE PICKS
JPM US Equity Income
This £2.9bn fund is a more recent addition to the sector following its launch in December 2008. It is co-managed by Clare Hart and Jonathan Simon, who seek to provide returns through investing in US equities across any economic sector. The strategy has so far paid off, with the fund delivering an impressive 79.9 per cent over five years to December 17, outperforming its peer group. Its largest allocation at 29 per cent is to financials, followed by consumer discretionary at 12.6 per cent. Among its top-10 biggest holdings are Wells Fargo, Pfizer and Home Depot.
Marlborough US Multi-Cap Income
Paul Tryon and John Lemery co-manage this modest £11m fund from Marlborough, and it aims to provide a growing level of income with capital growth. As the name suggests, the vehicle can invest across the market-cap spectrum in the US. The fund’s top-10 positions include well-known names such as MasterCard and ConocoPhillips. The latest factsheet reveals the fund is not exposed to micro or small-cap companies, but it has a 4.3 per cent weighting to mid caps, worth between $1bn and $5bn. The fund launched in October 1983 and has delivered positive returns across one, three, five and 10 years.
EDITOR’S PICK
Jupiter North American Income
Managed by Sebastian Radcliffe, this £383m fund launched in September 1998 and aims to provide long-term capital growth by investing primarily in North American blue-chip companies. The portfolio’s top-three holdings are Microsoft, JPMorgan Chase and Comcast. Financials account for 24.5 per cent of the fund, which also has 17.3 per cent in healthcare and 13.4 per cent in technology. Mr Radcliffe has delivered consistent returns over both long- and short-term periods, and has generated 49.1 per cent in the three years to December 17. The manager could be deemed an experienced pair of hands in this asset class.
