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The US is fast becoming a standout income market

This article is part of
Global Opportunities - November 2016

The US is fast becoming a standout income market
Dividend growth 1999-2016

The UK is home to some of the most established dividend names in the world, many of which have grown their annual income payments for consecutive decades. Investors will be familiar with many of these names: British American Tobacco, Vodafone and Next are just a few.

In spite of the UK’s strengths, there is an overreliance on it as a source of income. The UK makes up just 6 per cent of the global equity market index and yet it is not uncommon for UK investors to rely solely on UK equity income funds as a source of income. With dividend cover at multi-year lows and the uncertainties associated with Brexit hanging over the corporate sector, the risks of only considering the UK for yield are particularly pertinent today.   

If the UK is the most over-represented relative to the global equity market in income portfolios, the US – which makes up more than half of the MSCI All Country World Index – is surely the most under-represented. Data shows that US equity income strategies in the UK account for just £5bn. This compares to the more than £80bn invested in UK equity income. 

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With a growing dividend market, very low payout ratios and high dividend covers relative to the UK, the US is one of the standout income markets globally. 

It is a common misconception that the US is not an income market. While starting yields may not be as high as in the UK and Europe, from a dividend growth perspective it’s been the place to be in recent years. Dividends in the US have grown at a compound annual growth rate (CAGR) of more than 7.5 per cent since 1999, versus just 3.5 per cent CAGR in the UK. This also puts the US ahead of Europe and the global market. 

Indeed, the US has plenty of companies that more than give the UK’s staple of dividend aristocrats a run for their money: Johnson & Johnson, Pepsi and Stanley Black & Decker have all grown their annual dividend payouts for more than 40 years in a row.

While the ability for UK corporates to pay dividends has been hit by commodity volatility and Brexit fears, US income is in robust health. Dividend cover of 1.78 and a pay-out ratio of just 56 per cent compares to 0.72 and 138 per cent, respectively, in the UK. 

Such plentiful dividend growth bodes well for investors – not only from an income perspective, but from a total return perspective as well. Over the long term, dividend growth stocks have significantly outperformed the wider market in the US, whereas companies that cut their dividends have significantly underperformed. Dividend growth has also outperformed high-yielding stocks, particularly during periods of rising interest rates. 

The US is also home to income opportunities that are not readily available elsewhere. A number of cash-rich US tech stocks are now sustainable dividend payers, including Microsoft and Apple, along with lesser-known names such as Texas Instruments.