Dividends and equity income remain a popular choice for many investors in the search for yield, with the US becoming a more prominent player as its dividend culture improves.
Figures from the August edition of the Henderson Global Dividend Index (HGDI) shows dividends from the US have more than doubled from $49.9bn (£40.3bn) in the second quarter of 2010 to $101.7bn in the second quarter of 2016.
But while there were four US stocks in the top 20 world’s highest dividend payers in the second quarter of the year – Walmart, Apple, ExxonMobil and AT&T – there are headwinds to the development of US equity income.
The Henderson Index report notes subdued profit growth, partly attributed to a stronger US dollar, meant the 4.6 per cent underlying growth of US payouts, “was the slowest rate of growth since 2013”.
It points out while Walmart and ExxonMobil are among the world’s highest dividend payers, they each raised their dividends by less than 3 per cent in the quarter, while Apple raised its overall dividend by 4.2 per cent.
The report continues: “A number of US sectors, including transport and industrials, showed lacklustre dividend growth in comparison to recent times. The energy and mining sectors meanwhile continued to see declines, along with cuts from companies that supply the oil industry with equipment. The slowdown in the US began late last year but should be considered a normalisation to more sustainable levels of dividend growth after several quarters of double-digit increases.”
With the US election now less than a month away, there is potential for the controversy that has so far surrounded the two candidates, particularly Donald Trump, to transfer into the equity markets and, eventually, into dividend growth.
But Wouter Sturkenboom, senior investment strategist Emea at Russell Investments, suggests: “While it may be too early to discount the impact of the outcome of the US election, we are confident that the results are unlikely to drive the markets. We remain focused on the fundamentals of the US stockmarket, the growing economy, earnings and valuation.
“The election is important, but when it comes to the markets, our attention is more squarely focused on US corporate earnings and if they can reaccelerate as quickly as current expectations. Ultimately, this is likely to factor much more into market activity and expectations than the election.”
These headwinds are likely to be more short term in nature, however, with the prospects for future dividend growth looking positive as the dividend culture in the US improves.
Mike Clarfeld, co-manager of the Legg Mason IF ClearBridge US Equity Income fund, points out there is likely to be decent volatility in markets for the rest of the year, highlighting the US elections and a “long list of things that could cause volatility these days”.
But he adds: “Dividend investing in the US is not just current yield but dividend growth. Also, payout ratios in the US are much lower, the average is about 40 per cent while in the UK it is 100 per cent. This means two things: even if there is a downturn, dividends should be sustainable and it means there should be room for growth as they could raise the payout ratios gradually over time.”
