USA: the land of income opportunity?

17th April 2012

The US is known as the land of opportunity. It is famous for its entrepreneurial spirit, for companies which start off in someone's backyard and grow to dominate worldwide. More recently though, investors have started to talk about the US as a source for income. So, some 230 years after the cooperative union was agreed in the Declaration of Independence, is the tide finally turning for corporate USA?

In the past, paying a dividend has been seen as a weakness in the US stock market – a signal that the company can no longer grow. But fund managers I have been speaking to are now hopeful that this attitude will start to change, particularly on the back of Apple's announcement last month that it will pay its first dividend for nearly two decades.

It's worth noting however, that the new man in charge made a point of emphasising their continued investment in research and development when the dividend was announced.

Apple's decision follows in the footsteps of Cisco, which paid a dividend for the first time last year, and Microsoft which raised its dividend by as much as a quarter in 2011. Now the dividend amounts themselves are not record-breaking, with the majority of sectors in the US market producing an average yield of 1-3%. The market itself (S&P 500) has a yield of 2.06% compared with 2.11% for the Topix, 3.52% for the FTSE100 and 3.88 for the DJ Stoxx Europe 50. But actual dividend payments increased 16% in the US last year while 2012 is expected to set a new record.

And there are some high paying companies to be found. Recent research from Investec Wealth & Investment showed that from the top 100 global companies based on yield, 15 were from North America while just 5 were from the UK. The telecommunications and utilities sectors are currently the sectors paying the highest dividends with averages of 5.6% and 4.3% respectively.

But it's also the variety of companies in North America now paying dividends, which I believe to be significant. Of the 10 different sectors in the US market, just one has less than a quarter of companies paying a dividend. Three sectors have more than half of companies paying one. Importantly, this means that the market for dividend payers is much more diversified than in the UK: The top five stocks in the S&P 500 index account for just 16% of yield generation, whereas in the UK the top five stocks in the FTSE100 account for more than a third.

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