How the American ‘Aristocrats’ are boosting dividend income
M MOST investors in search of income look no further than a d dividendfr friendly FTSE 100 company or an income-orien income-oriented UK i investment fd fund as a home for their money.
But dividend income is not the exclusive domain of the UK stock market. Many Asian firms have started to pay dividends, spawning the launch of a swathe of incomefriendly Asian funds, while ten global investment trusts have been extracting a growing income from their portfolios for more than 30 years.
Yet income seekers often overlook one of the biggest generators of dividend growth – the US stock market. Numerous American firms – familiar brands such as Coca-Cola, ColgatePalmolive and Johnson & Johnson – have quietly but surely built outstanding dividend records.
Among the constituents of the S&P 500 Index of America’s 500 biggest listed companies, 29 have increased their dividends for more than 40 consecutive years.
Indeed, financial data researcher Standard & Poor’s has created an index – the S&P 500 Dividend Aristocrats – that tracks the performance of companies that have increased their dividends for more than 25 consecutive years. This index has outperformed the S&P 500 over the past one, three, five and ten years.
JPMorgan US Equity Income is one of just a few investment funds that invests in the US with an income bent. Popular with UK investors, it has £2billion in assets and has outperformed most rival US funds over the past five years.
Among its top ten holdings are companies in the Aristocrats index – Exxon Mobil (33 years of sustained dividend growth) and Johnson & Johnson (53 years).
Its manager, New York-based Clare Hart, targets about 100 companies with a minimum yield of two per cent, mostly drawn from the S&P 500. She says: ‘Within the US market, there is a broad spread of income yielding equities across a range of sectors – financials, healthcare, consumer goods, utilities and telecoms.
‘More than 80 per cent of the companies in the S&P 500 pay a dividend and many are increasing them. This contrasts with the UK, where investors are dependent on a handful of large dividend payers concentrated in a few sectors.’
Hart is meticulous when picking firms for the fund. She prefers those that do not use most of their earnings to pay dividends. Businesses with low ‘pay-out ratios’, she argues, ‘reward investors with a dividend today while leaving capital available to grow shareholder value and enhance tomorrow’s dividend’.
Hart refuses to be drawn on the US presidential election and who she would like to see in the White House, Hillary Clinton or Donald Trump. While some see Trump as good for the economy because he wants to cut taxes and hopefully stimulate growth, Clinton could hit the pharmaceuticals industry with measures to cut the high cost of drugs. All Hart is prepared to say is that the ability of the presidential candidates to make changes is ‘at best a few years, rather than a few months, away’.
But she is more forthcoming on the outlook for the US economy, believing it will avoid recession.
She says: ‘Corporate profitability should do better this year as the headwinds from the dollar and energy prices moderate. Strong cashflows should support higher dividends, so reasonable returns are probably what investors can best expect for the year ahead.’