US is a new frontier for equity income

US is a new frontier for equity income

The US equity market has never traditionally been viewed as a good place for income investors to go, but that has changed in recent times, according to Will McIntosh-Whyte, multi-asset fund manager at Rathbones.

Mr McIntosh-Whyte says that in the US, historically companies were more likely to invest the surplus cash they had into growing the business, while in the UK company managements were more likely to pay out the cash as a dividend, rather than try to grow the business, and this has not always been in the best interests of investors. 

Another issue for investors looking at the US equity market has been that much of the growth seen over the past decade has come from a small number of technology companies, most of which do not pay a dividend.


Managing expectations

Mr McIntosh-Whyte says: “The first thing we have to do when working with a client is manage their expectations, to help them understand that the 5 per cent annual income yield that was considered normal in the past is very difficult to achieve in a world of low interest rates.

Key Points

  • The US market has changed in terms of equity income
  • US equities can provide good defensive income
  • An income fund needs to have access to growing assets

“We think an annual yield of 3 per cent is more realistic.

“As part of that you need to grow the capital [the 3 per cent is calculated from a larger portfolio size], and that means we are happy to have some stocks in the income portfolios that don’t really pay dividends, such as Amazon and Alphabet, as they provide growth.

“But in the context of the US market, it can provide quite good defensive income – it is the largest and most liquid market in the world and there are companies listed on that market of the kind you can’t find anywhere else.”

He continues: “Also, as we are seeing right now, at times of extreme market turbulence the dollar tends to strengthen relative to other currencies, so the value of the dollar income rises for sterling investors.

“Some of the traditional income areas of the market in the UK, such as utilities, are operating in a tougher regulatory environment, making them less attractive as income investments when compared with their US equivalents where the relationship with the regulator is better.”

David Jane, who jointly runs a range of four multi-asset funds at Premier Miton, is another who views the US equity market in a positive light as an income investor. 

He says: “As outcome-driven fund managers, we firmly believe it is as important to diversify sources of income as it is to diversify the capital of a fund.

“Therefore, while it may be attractive to lean heavily on a few regions or sectors for income, this is a risky strategy if things go wrong.

“For this reason, we look for income opportunities across all asset classes and regions.