“At 31 March the highest-yielding stocks in the S&P 500 were trading at 16.4 times forward earnings, a premium of more than four multiple points relative to their average of the past 30 years,” she says. “By contrast the highest dividend-growing stocks were trading at less than a one multiple point premium.”
Eastern promise
Steep valuations across the developed world has led some fund managers to head east. While markets there may be more volatile, many agree that Asia’s emerging middle class and growing dividend-paying culture has plenty to offer income investors.
Of all the countries in this region, Japan is perhaps the hottest topic. Although its companies tend to yield less than their Western counterparts, there are reasons to believe that the corporate Japanese habit of sitting on cash is beginning to change.
Valuations are comparatively cheap, too, as the Bank of Japan’s poorly received negative interest rate policy sent sentiment crashing.
These developments have captured the attention of Ben Lofthouse, co-manager of Henderson’s Global Equity Income fund. “The payout ratio… [in Japan] is low versus other markets at around 30 per cent, whereas somewhere like the UK would be around 50 to 60 per cent, so there is the potential for dividend growth,” he says.
“We have seen a lot of dividend growth in the last few years from the market as a whole. But it is hard to determine whether it is a cultural change, a change in the way companies are run, or whether it’s more because of the currency gains they’ve made with the devaluation of the yen a few years ago.”
Europe slips under the radar
Mr Lofthouse has also taken an interest in European stocks. Banks generate less profit when interest rates are low, as disgruntled savers place their money elsewhere and lending becomes less lucrative.
However, Mr Lofthouse claims that depressed European share prices fail to reflect that some of these high-yielding names are capable of weathering the storm better than others.
Other attractively yielding sectors that he currently considers to be “very cheap” on the continent include telecommunications, pharmaceuticals and real estate.
VCTS and infrastructure
As the comments above indicate, fund managers are having to adopt new, slightly riskier strategies to find value in the equity income market. Prices have surged after record low interest rates pushed an increasing number of yield-hunting investors into reliable income-paying shares.
Mindful of these challenges, Jason Hollands, managing director at Tilney Bestinvest, reckons those hunting for yield should perhaps widen their search to include less mainstream asset classes such as Venture Capital Trusts (VCTs).
