"The portfolio's goals are to provide interesting current income, and over the long term, to grow that income on a per-share basis. The direct consequence of success in those two is likely to be capital appreciation. Because global dividend-paying stocks are so well suited to the above goals, our portfolio has generally been, and is likely to continue to be, dominated by that asset class. Fixed income and other income-generating asset classes are also important to the portfolio. If we're able to find companies that show both an ability and willingness to pay shareholders a significant portion of earnings, and those companies are in a position to create value over time through growth, we may find continued success."
— Brian McMahon
Global Diversification Can Improve Yield
U.S. corporations have historically reinvested capital in businesses rather than returning it to shareholders in the form of dividends. But in overseas markets with stronger dividend-paying cultures, this tendency is reversed.
Yields are often higher in Canada, Europe, Australia, Latin America, even China. See the index data in the chart below.
Investors sometimes think of high dividend yields as limited to the utilities or telecom sectors, but we search for promising dividend payers in a range of sectors and geographies.
We often see interesting income levels in European telecoms (5.0%), and in U.K. energy (7.0%) and Australian financials (5.9%), for example.*
*Average dividend yield estimates per MSCI country and regional indices. Europe excludes the United Kingdom. Sourced via Bloomberg, as of 9/30/16.
Ability and Willingness
We search the globe for companies with the ability and willingness to distribute earnings to shareholders.
Fixed income plays a supporting role in the portfolio, aiding in income production and potentially muting volatility over time. And in the Income Builder portfolio, we don’t limit ourselves to bonds of a particular type or credit quality in the search for the best risk/reward trade-off. Bonds have ranged from around 10% today to more than 40% of fund assets.
Investors tend to focus on current yield, or current income divided by current price. While useful, current yield is only a snapshot. It can be helpful to look beyond it — to yield on cost, which is annual income divided by the cost of an initial investment — reflecting an investor’s yield on their original purchase.
If one were to invest a hypothetical $100,000 in a security with a current yield of 5% at purchase, and income grew by 50% over time, the yield on cost of the initial investment would have grown from 5% to 7.5%.
With both declining price and declining income, an investor can experience a current yield that remains level. Similarly, with a rising price and flat income, current yield would decline. So as investors choose which vehicles to use for income, it’s important that they understand per-share cash flow (the actual dollar amount of income received per share) as a true measure of income — along with current yield and yield on cost.