Don't Overlook US Stocks for Income

The US is not a traditional hunting ground for income-seeking investors, but these managers say there are plenty of opportunities to be found

Holly Black 30/06/2020 14:58:00

Wall Street

Investors on the prowl for income could easily overlook the US. This is a market known for its fast-growth stocks; a region where Tesla’s shares can double overnight and exciting tech stories dominate.

It's not hard to see why: the US stock market, the S&P 500, yields just 2% compared with the FTSE 100’s 4% in the UK. But for those investors willing to delve beyond the likes of Facebook and Netflix, there are far meatier dividends to be had.

In a volatile US election year, with the coronavirus pandemic making investors jittery, it could be a story worth paying attention to. Thom Forsha, co-manager of the Aviva Investors US Equity Income fund, says: “Companies with secure, growing dividends are inherently attractive, but never more so than when investors fear that the tide is receding.”

Perhaps one reason investors often overlook the income potential of the US is that there are only a handful of funds focused on this part of the market. Fran Radano, manager of the North American Income Trust (NAIT), says: “For UK investors, there’s a feeling that if you wanted boring dividend payers you can get that at home. Why buy Verizon, when I can buy Vodafone? That’s not why you go to the US; you go to the US for Facebook and Tesla.”

Certainly, the "slow and steady" stories such as Chevron (CVX), Verizon (VZ) and railroad company Union Pacific (UNP) may seem less exciting than a fast growth fintech. But Radano's 40-strong portfolio is full of above-average dividend payers has meant the trust has increased its own pay out every year. 

He adds: “You could, technically have a bit of Facebook, with a 0% yield and invest in something yielding 6% and it would balance out to our target yield of 3% - but we don’t want to do that.”

A Change in Perception

The US market has also historically suffered from the perception that its companies were not shareholder friendly, but that has started to change in recent years, helped by an increased focus on environment, social and governance (ESG) factors.

According to Aviva’s Forsha, there are more than 1,000 stocks listed in the US yielding more than 2%. And if 2% doesn’t sound that enticing, it’s important to remember that it’s dividend growth that is most important for income-seekers.

Radano has moved away from retail and consumer companies in recent years; he did invest in luxury jewellery company Tiffany but was disappointed that the group “missed every major jewellery trend of the past decade”. 

Instead, he has found opportunity in Restaurant Brands (OVFA), the company behind fast food giants Burger King and Popeyes (famous in the US for its chicken burgers). It’s a franchise business model, which means little risk for the parent company and, while consumers are tending to eat more healthily, Burger King was the first fast food name to put a plant-based burger on its menu, so is well-placed to tap into that trend.

Forsha, meanwhile, likes the energy sector and particularly the companies building the infrastructure to get US-produced oil and gas out to global markets. Real estate, technology and communications services are other areas he currently likes and top holdings in the fund include energy infrastructure company Kinder Morgan (KMI), which owns and operates gas pipelines, pharma giant Bristol-Myers Squibb (BMI), and telecoms conglomerate Comcast (CMCSA).

Tony DeSpirito, manager of the BlackRock North American investment trust (BRNA), has been avoiding so-called “bond proxies” such as utilities and telecoms. Instead, he has been looking to cyclical areas such as healthcare providers and software businesses, where earnings growth should be greater, which should mean dividend increases in the future. Top holdings in the trust include Microsoft (MSFT) and medical device company Medtronic (MDT). 

 Fund Yield (%) 5-yr Annualised Return (%) Ongoing Charge (%)  Morningstar Rating
Aviva Inv US Equity Income Fund 3.50  8.58  0.88 Bronze / 3
BlackRock North American 5.10  11.53 1.09 2
iShares MSCI USA Quality Dividend ETF 2.76 12.59 0.35 5
North American Income Trust  3.77 12.26 0.91 2

Source: Morningstar Direct. March 23, 2020

Passive Income Options

But investors don’t have to stick to actively managed funds to find income in the US. The iShares MSCI USA Quality Dividend ETF might have a lower yield than some of these funds at 2.76% but it also only charges 0.35%. The fund tracks US companies with a sustainable, above-average dividend yield and includes names such as retailer Home Depot, telecoms giant AT&T and Proctor & Gamble, the company behind household brands such as Fairy and Ariel.

While the so-called FANG stocks may get most of the headlines, income managers have the sights set on other parts of the market and are convinced it will pay off in the long-term. Forsha likens the current trend to the 90s dotcom boom, when dividend payers and value investing were sharply out of vogue. A number of the survivors from the subsequent bust, such as Intel and Microsoft, later embraced a dividend policy and became favourites of income investors, he points out.

“In the end, we don’t expect to outperform our growth peers during a period like we have seen in recent years,” says Forsha, “But we do expect that investors will look toward the certainty that dividends provide when times are tougher.”

 

About Author

Holly Black

Holly Black  is Senior Editor, Morningstar.co.uk

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites
© Copyright 2020 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies