Equity Income  

Fund Review: US outlook improves as Q2 dividends rise 10%

Fund Review: US outlook improves as Q2 dividends rise 10%
Dividend payouts by US companies in H1

Investor appetite for equity income is well known, and yet the world’s biggest market has historically not been a favoured region for those seeking dividends.

On the face of it there are good reasons for this. The S&P 500 index may boast more than $7.8trn (£6trn) worth of investable stock, but it currently yields only 2 per cent. 

Compare this with the FTSE 100’s 3.8 per cent and Europe’s 3.1 per cent and it can seem somewhat futile heading to North America for income.

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As a result, the open-ended and investment trust universes host just 14 vehicles focusing on US equity income, with around £6.2bn in assets. 

None of these funds have outperformed the S&P 500 over three and five years. Similarly, across five years just two open-ended vehicles have beaten the IA North America sector average – which itself has underperformed the index by 15 percentage points.

On top of this, yields from these funds are not always as expected, especially when compared with multi-asset distribution funds or UK equity income strategies.

The top-yielding fund among the 14 offerings is Schroder US Equity Income Maximiser, with a payout of 4.9 per cent. The strategy tracks the S&P 500, collecting dividends from the underlying holdings, and then sells call options on individual stocks to add to income.

There is quite a gulf to the next highest yielders, both of which are investment trusts – unsurprisingly, given their ability to use reserves and leverage to enhance income. The strategies from BlackRock and Aberdeen both yield 3.1 per cent, but no open-ended fund – bar the Schroder Maximiser – has a yield greater than 3 per cent.

Despite the gloomy fundamentals surrounding US income strategies, recent figures from Janus Henderson show the outlook for dividends is improving. Payouts from US corporates rose 9.8 per cent in the second quarter of 2017 alone.

The Janus Henderson Global Dividend Index reveals dividend payouts reached a record $112bn in the second quarter. This is up from $107bn in the first quarter and $102bn in the second quarter of 2016.

Underlying growth rates are also improving, Henderson’s data shows. Annual underlying dividend growth in the first quarter was 5.3 per cent, but had risen to 5.9 per cent by the end of June. The global average is 7.2 per cent, a figure skewed by some emerging market countries such as Brazil, where underlying growth is 277 per cent. 

The US is also gradually catching the UK, where underlying growth is 6.1 per cent.

The Janus Henderson report says: “No US sectors saw dividend declines [in the second quarter]. North American dividends accounted for three dollars in every 10 paid globally.” 

This figure would be even higher were it not for a bumper three months of payouts from European companies.

The study adds: “[North American] dividends rose very rapidly, a faster increase than any other region with the exception of emerging markets.”

 

THE PICKS

JPM US Equity Income

The largest of the US income vehicles has been managed by the Clare Hart and Jonathan Simon since launch in 2008. Now at £3.7bn, the duo have matched the sector average performance over five years, beaten it across three years and currently provide a yield of just over 2 per cent. Performance is explained by a consistent overweight to financials and underweight to technology stocks. The managers currently allocate 31 per cent to financials, the largest individual sector position, with 11 per cent each in technology and healthcare stocks.