Yield to the inevitable
Buyers sticking to their global equity income guns are well acquainted with an old dilemma demonstrated by the above. In recent years US stocks have powered ahead, driven largely by the Fanmags.
Yet the US market yields relatively little, with most of the big tech names not paying much of a dividend. For a global income manager, that means risking lower total returns than the market if you go further afield for better yields.
But here comes a silver lining. Research firm CFRA notes that while the S&P 500 Information Technology sector offered a dividend yield of just 0.78 per cent at the end of 2021, some serious growth in payouts has occurred within the sector in the same year.
Of 76 companies in that sector, 44 paid a dividend, with nearly all of these either upping their payout or initiating one in 2021. A result is that tech contributed 17 per cent of the overall income for the S&P 500, making it the largest payer of dividends.
None of this suggests that names like Amazon and Alphabet will suddenly start paying dividends. But it does offer hope for income prospects in the sector more widely, while also providing a boost for the US.
Income funds may one day be able to achieve a greater balance of investment styles if more of the US market, and the tech sector, qualify for inclusion. Whether value-minded income managers wish to do that, especially on the cusp of potential further difficulties for tech and growth, is another question.
Bargain hunt
Surging energy prices and bumper profits for the likes of Shell and BP make a bear case for the sector less than straightforward, but that’s what some are maintaining.
BlackRock, for one, has used a weekly commentary to highlight an expected “repricing” of energy assets over the coming years. The company argues prices on “green” energy assets have risen between 2016 and 2019 and predicts more of the same between 2021 and 2025. It models the opposite outcomes for “browner” assets such as traditional energy stocks.
Of rallies in traditional energy shares, BlackRock counters: “This is a feature of transition, we believe, as they can benefit from mismatches in supply and demand as the economy is being rewired to reach net-zero carbon emissions”.
If recent gains do nothing to prevent the effects of the coming transition, other issues remain unresolved for fans of divestment and exclusion as an ESG strategy.
Critics of divestment worry that selling off the likes of traditional energy shares and depressing valuations will simply entice private institutions to buy them on the cheap. It’s another area of conscientious investing where a clear answer is sorely missing.
