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.”
Some of the traditional income areas of the market in the UK, such as utilities, are operating in a tougher regulatory environment Will McIntosh-Whyte,, RathbonesHe 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.
Mr Jane adds: “Even the US can provide an income stream from some sectors, but importantly the US offers some of the most attractive growth opportunities.
“An income fund that seeks to grow both its capital and its income needs to have exposure to growing assets so that it can reinvest capital gain to increase income over time.”
Michael Crawford, chief investment officer at Chawton Global Investors, says large US technology companies have now started to pay dividends, changing the perception of the US market as being a place where only growth investors can operate.
Key growth attributes
He says: “In recent years, US companies with highly cash-generative business models, such as Apple and Microsoft, have commenced paying dividends while continuing to generate significant capital growth.
“I believe more companies will follow their lead. As a result, equity income managers will be able to make greater use of the important growth attributes of US companies in income portfolios.”
John Bailer, who runs the BNY Mellon US Equity Income fund, says: “There is no doubt that over the past decade it has been difficult to construct a portfolio of income stocks in the US market. The companies that have done well are those that don’t often pay dividends.
“But there are areas where attractive income is being generated; for example, we have about 30 per cent of the fund in financial stocks.”
According to Mr Bailer, the key here is that while low interest rates generally don’t help banks, the US investment banking businesses have been winning market share from European competitors, and this is helping them to generate decent levels of cash and pay good dividends because investment banking is a business where they earn fees, and so are less vulnerable to interest rate movements.
And because banks are regulated, they can only pay out cash as dividends if the banks are confident they have the financial strength to afford to do it.
Mr Bailer also says technology stocks “can afford to pay out more of their cash as dividends”, but this is not the only source of income coming from US companies, as far as he is concerned.
Mr McIntosh-Whyte and Mr Bailer are both keen on US real estate investment trusts as a source of income, with Mr McIntosh-Whyte preferring those to UK Reits at the present time.
For the canny income-seeker, therefore, there may be more opportunities in the US than traditionally believed.
David Thorpe is special projects editor of Financial Adviser and FTAdvise
