Challenge conventional thought, there is yield in global equities!
Retirees are often exposed to substantial income domestically, but in an increasingly global world, where else can they look? This question becomes increasingly pertinent when one looks at the backdrop of an incredibly low yield environment, with bonds at historical lows, even negative levels! In this note, we will discuss the fundamental importance of yield to total return, and how at Plato, we continue to challenge conventional wisdom to develop a truly global income offering for clients.
Yield or Total Return. Do we need to sacrifice either?
There is a tendency for our industry to focus on headline returns, but does this need to be at odds with retirees’ income requirements? Over longer time frames the contribution from yield to total return is surprisingly high. Figure 1 illustrates the significant contribution from yield (blue) to the overall total return around the world. For illustrative purposes we used a simple 10 year average of both total return and net yield. As you can see the contribution outside of the U.S. has been substantial. Unsurprisingly, this is true domestically, but yield accounted for ~70% of total return in Europe and the Pacific region over this period. When coupled with the current low growth outlook of many analysts, this highlights the increasing importance of yield to headline returns. Consequently any strategy that maximises income would be a useful addition for yield starved clients.
Figure 1. Yield as a Percentage of Total Returns Globally (10 year average % as at 26 Jun 2017)
But there’s no yield in global equity! Is there?
With a primary income objective, retiree clients understandably shy away from global equity when they contrast the global yield ( ~ 2%1) with the appetising levels (~6% franking credit adjusted) they can currently get domestically. In itself this could have significant impact on future lifestyle. But before we write off a global allocation, alternative country indices illustrate that there is pockets of strong yield in global equity. Figure 2 highlights some of the high yielding developed countries that comprise the MSCI World index. This charts the 10 year average income yielded by some major developed countries. The US dominance reduces overall global yield levels, but you can see compelling income can be harvested across other regions, like Europe. Immediately this highlights the benefit of geographical diversification for a yield hungry investor. This diversification can also reduce the industry concentration of stocks that generate the bulk of domestic income.
Figure 2. Dividend Yield by Country (10 year average % as at Dec 2016)
Where are these Global Opportunities?
In the global universe there is a vast opportunity set to search for sustainable high yield stocks, which is not available domestically. This allows investors to diversify their industry and country exposures. In figure 3 you can observe that global opportunities (blue) dwarf those domestically (red). Globally, every month has significant income events, the lowest in January still offering around 400 individual ex dates. At a micro level there are many stocks that offer substantial income to a yield starved investor. This is true even in low yielding countries like the US, which on average has offered a dividend yield around 2% p.a. based on Figure 2. Even in such a low yield country there are currently in excess of 210 stocks in the universe1 that yield more than 4% p.a. Well known examples include huge mature businesses from US auto’s firm General Motors (+4.4% p.a.) to US Telco AT&T (+5.0% p.a.). Figure 4 represents the number of stocks in the global universe, bucketed by their yield. In excess of 700 names offer at least 4% p.a. of income (compared with 84 domestically2). This vast universe is rich in income opportunities, requiring a strong income objective and systematic approach to both forecast and ultimately harvest yield for clients.
Figure 3. Ex-dates per month
Figure 4. Dividend paying stocks by annual yield (as at 26 Jun 2017)
Domestic demographics demand an increased need for the funds management industry to focus on retirees and objective based solutions. Let’s not write off the fantastic global income opportunity when investing to meet future client needs. Plato’s next note in this series will further investigate the exciting global yield landscape.
1 The universe is MSCI World Ex Australia IMI
2 The universe is S&P ASX 200