Investing in the US Part 6

Elisa Trovato: How easy is it to get yield out of the US equity market?

Mouhammed Choukeir: It is much harder to get yield out of the US equity market than other regions. The US equity market in aggregate yields around 2 per cent to 2.5 per cent whereas the UK is at 4 per cent. Investors want yield, central banks are going to keep rates low for a very long time, and the inflation headwinds are not going to go away any time soon. We see more and more investors going into dividend paying or income paying strategies. The challenge for the US is historically it has not been a market that gives back in terms of income. A lot of the time companies used to use the additional money for share repurchases and so on, which on a total return basis is not too bad.

Oliver Gregson: One area of interest for investors is the income from high yield bonds. That market was established in the US and is deeper, more mature and more liquid. While we are still constructive on that asset class, it is primarily for the coupon that you can clip, in a relatively low interest rate environment, in addition to the fact that our expectations for total returns going forward are going to be much lower than they have been historically. The importance of income in driving the return that investors receive is a big area we are seeing flows into.

Lars Kalbreier: What is clearly worrisome is that high yield bonds have become so acceptable now. If you look at default rates they are much lower than they used to be. You could argue that companies are being better managed, that they have more cash on their balance sheets, etc. Unfortunately, we all do the same analysis and we all know how these things usually end. It is lack of alternatives that is the problem.

Bill McQuaker: The upcoming presidential elections might have implications for either the dividend paying capacity of US companies or their ability to buy back stock. There is a massive amount of cash held offshore by US companies, which are very international in nature. They have mature overseas businesses that generate cash. At the moment the tax code is such that it is disadvantageous to US companies to bring that money onshore.

One possibility is that if the Republicans win and are trying to find business friendly policies to pursue, then there might be a willingness to grant an amnesty, so that that cash can come back onshore into the US without generating a tax liability. It could be done as a one-off amnesty or, perhaps could be part of a restructure in the US tax code. Cash balances at the moment in the US are extremely high. This would be the icing on the cake if they were allowed to repatriate overseas cash as well.

Grant Bughman: The other thing about dividends is that corporations recognise the interest in shareholders receiving dividends. We have seen over the last few quarters more and more CFOs and CEOs talk about increasing dividend payout ratios. While looking backwards the yields on stock in the US have been low, corporate America is realising that this is how they are going to be judged in terms of their share prices and so they need to figure out ways to increase payouts to shareholders.

Claudia Panseri: This is also because now it is a new style. People have been speaking about growth, value and now income. We are probably more sensitive to see which stocks are able to pay growing dividend over time, rather than high yield payers in absolute terms.