During the 25 years prior to 2009, investment income was
ridiculously easy to come by. Doing something as simple as buying
a 3-month Treasury bill produced an average yield of nearly 5%.
That all changed, however, in late 2008, when yields dropped.
Since then, investors looking for income have had to become
more creative, and many have looked to equities for income.
But with the bull market now more than 5 years old, you may be
wondering whether this approach still makes sense. My answer:
Yes, assuming you can take the volatility and look beyond
To be sure, as I pointed out in a recent post, I'd be wary of
seeking income at all costs and ignoring valuation. In other
asset class cross-dressing
, or using stock portfolios to generate income while
simultaneously building equity-like exposure in bond portfolios,
is becoming risky in some scenarios.
However, there are segments of the dividend space that still
look interesting: international and global
. Here are two reasons why:
Stocks are still cheaper than bonds.
While stocks are no longer cheap,
they are cheaper than bonds
. One way to measure this - particularly for investors focused on
income - is to compare the yield available from a bond fund to
the yield available from an equity alternative.
the dividend yield
on a broad global benchmark (the MSCI World) has, on average,
been 40% of the yield generated from an investment-grade bond
index (Moody's Aaa). Today the ratio is closer to 60%, as the
figure below shows.
While this is below the record of 80% recorded two years ago,
it still compares very favorably with the norm. In addition,
equities have three additional advantages over bond alternatives:
tax treatment favors dividends, stocks have the prospect for
future capital gains and
stocks can provide a better inflation hedge
International dividend funds look cheaper than U.S.
While stocks offer better value than bonds, I would bring up
exposure to international and global dividend funds rather than
focus exclusively on U.S. dividend funds, which look more
expensive. Reflecting this fact, dividend yields in the United
States are low compared to the rest of the world. The S&P 500
yields roughly 1.9% versus 3.3% for other developed market stocks
(MSCI World ex-USA Index) based on World ex-US and 2.70% for
emerging market equities (MSCI Emerging Markets Index).
At less than 2%, the current U.S. dividend yield not only
looks relatively low compared to the rest of the world, but it
also looks low compared to its own history. And while the yield
on U.S. equities is close to its long-term average, the yield on
other developed market stocks is nearly 30% higher than the
Still, there's no getting around the fact that stocks are no
longer cheap. Given current valuations, I would expect returns
over the next five years to be substantially lower than the
In addition, investors need to remain mindful of risk. While
stocks are cheaper than bonds,
equities generally come with more volatility
. Today the case for equities as a dividend source comes down to
relative value: Stocks are cheaper than bonds while
simultaneously providing some upside potential.
The bottom line: For investors looking for income,
international and global dividend funds are still a reasonable
choice, at least given the alternatives.
Sources: BlackRock, Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
and you can find more of his posts
There is no guarantee that dividends will be paid
International investing involves risks, including risks
related to foreign currency, limited liquidity, less government
regulation and the possibility of substantial volatility due to
adverse political, economic or other developments. These risks
often are heightened for investments in emerging/ developing
markets or in concentrations of single countries.