(May 10, 2012) — Investors in the United States with home market bias risk severely limiting their income potential, says PIMCO’s Raji Manasseh.
The report’s author asks: With so many investors piling in, have dividend-oriented equities become a “crowded trade” and an “unsafe bet?”
With dividend payout ratios on the decline in the US, taxes potentially on the rise, and valuations in sectors that typically offer attractive dividends near historical highs, global equities can provide more attractive dividend income opportunities, Manasseh asserts.
“We believe that in many cases, investors are over-reaching for yield in the wrong places and for the wrong reasons, which could have negative consequences for those sensitive to downside risk,” Manasseh writes, noting that global equities have the potential for additional benefits, including diversification.
The report by Manasseh, PIMCO’s senior vice president and dividend strategies product manager, urges investors to think of the dangers of home-country bias similarly to putting all your eggs in one basket, increasing concentration risk in the portfolio and the potential for loss if one sector falls in value.
“Despite this risk, over the past year, the majority of inflows have gone to U.S.-focused dividend mutual funds and exchange-traded funds (ETFs), prompting much of today’s concern,” Manasseh continues, outlining the following fundamental problems with a US-only dividend strategy:
1. Dividend payout ratios in the US have been in secular decline.
2. Since 2003, US individual investors have enjoyed a lower tax rate on the qualifying dividends they receive, but this may change as the tax rate on dividends is scheduled to significantly increase at the end of 2012, barring new legislation.
3. The US equity sectors most commonly targeted by investors for income (telecoms, utilities, REITs and MLPs) are trading at historically high valuations.
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