Look to US equities for income while markets calm - JPMAM

Added 31st May 2016

While market volatility has eased it’s better to collect dividends from US equities than put money in cash or fixed income, said David Kelly, JP Morgan Asset Management's chief global strategist.

Look to US equities for income while markets calm - JPMAM

The positive outlook for dividend growth in US equities could make them particularly interesting for UK equity income investors tired of the fall in FTSE-listed firm's dividends, according to Kelly.

While UK and European equities are standing still or are in negative territory, US equities have risen 1.8% in the last 18 months. Meanwhile, a large-cap US stocks investor could have gained a further 3.3% in dividends in the same time period.

Valuation levels good

Another reason to consider equities’ relative income advantages at the moment is that equities are neither cheap nor expensive on a historical basis, noted Kelly.

“Most US companies are actually growing, generating a huge amount of cash, and are focused on shareholder returns, with the ever growing band of activists snapping at the heels of any that disappoint,” explained Christian Preussner, US equities client portfolio manager at JP Morgan Asset Management.

He is of the opinion that corporate America is in good financial shape, with “reasonably strong fundamentals.”

“Even in a world of modest growth, investing in US equities still looks sensible,” he added. This is because the record levels of cash that US companies are sitting on make them able to provide investors with dividends, buy backs or to make acquisitions, noted Preussner.

Dividends strong

And while UK dividends fell 3% in the first three months of this year, according to Henderson Global Investors, dividends are actually growing in the US. Despite the energy and basic materials sectors cutting payouts in response to falling earnings, average US dividends are up 4.6% year-over-year in the first quarter, said Preussner.

Meanwhile, a recovering oil price and stabilising dollar bode well for future dividend growth, in Kelly's view, based on the fact that S&P earnings should rebound in the second half of this year and into 2017.  

"US equities can be a fertile ground for gathering income in a continued low-yield environment, where interest payments from bonds or cash are delivering virtually nothing," said Kelly. 

“We expect US corporate profits and thus S&P 500 earnings to reaccelerate in the second half of 2016. The rapid pace of US dollar appreciation may be behind us; this may indicate the potential for upside earnings surprises as early as next quarter resulting from a weaker US dollar,” added Preussner. 

JPM US Equity Income Fund currently favours financials and selective names in consumer companies. 

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