How you can make money from the US

ALTHOUGH the American stock market’s powerful performance in recent years has been driven primarily by technology stocks – the likes of Alphabet, Amazon, Facebook and Netflix – there have been other ways to make smart money from across the pond.

Investment trust BlackRock North American Income has proved this. Without dabbling in these darlings of the US equity market, it has generated attractive returns while paying shareholders an appealing income above four per cent a year. Over the past five years, investors have enjoyed overall returns of 113 per cent – better than the return recorded by the average North American investment trust.

The trust is managed out of New York by a three-strong investment team. Franco Tapia, part of the triumvirate, says the emphasis is on hunting down businesses that have ‘strong balance sheets, good management at the top, and are keen to reward shareholders with a growing dividend stream’. But companies are only bought if the shares represent ‘reasonable value’ – in other words, they are not over-priced.

While most of the 86 businesses the trust invests in are listed in the United States, a slice is overseas. ‘The key,’ says Tapia, ‘is that the companies have global franchises with a big presence in the United States.’ This explains why BP, Dutch electronics giant Koninklijke Philips and medical device company Medtronics (headquartered in Ireland), are among the trust’s top 10 holdings. Currently, some 17 per cent of the trust’s assets are invested in companies listed outside the United States.

Tapia remains ‘cautiously optimistic’ about the US stock market, yet acknowledges there are some black clouds lurking on the horizon. He says: ‘Yes, there are bearish factors out there. They include geopolitical risks encompassing China, Saudi Arabia and Iran, and Brexit, as well as high company valuations and an economic cycle that has been in growth mode for a long, long time. But on the positive side, wage growth remains strong, the consumer is still spending and unemployment remains low. I am more positive than pessimistic – and I think the dividend focus the trust has gives it a reassuring resilience.’

The trust pays quarterly dividends and is on schedule to reward shareholders in the current financial year with overall income of 8p per share (the shares were priced at £1.85 at the close of play on Friday). This would keep dividend payments at the same level as they were in the previous year, but way ahead of the 4.95p a share that was paid in the year to the end of October 2017.

Tapia’s team tops up the dividends from the trust’s holdings with income earned from selling socalled ‘covered options’ on shares they own. These generate an automatic ‘premium’ (paid by the buyer) that bumps up the trust’s income reserves, although if the option price agreed (the strike price) goes on to be exceeded by the time the option runs out (typically 45 days), it forces the trust to sell the shares, limiting the profits it can bank.

In the first half of the trust’s current financial year, premiums from the selling of such options accounted for a third of total income generated. Tapia says the options are an important ‘risk diversifier’ even if they can compromise the trust’s performance when the US stock market is in an exuberant mood. The trust’s overall charges at just over one per cent are competitive.