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Dividends & Income

INVESTMENT INSIGHTS  |  January 2017  |  FEATURING Joyce E. Gordon

Finding Income in a Low-Rate World

Historically low interest rates have put a damper on income for many investors. CDs, Treasury notes and other guaranteed investments, while once a source of modest income, have lagged over the years. For example, the typical five-year CD interest rate is 0.82%, and the five-year daily treasury yield curve rate is 1.83%.* That means many investors have had to adjust their expectations or look to other, more risky, investments to help them pursue income.

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INVESTMENT INSIGHTS  |  September 2016  |  FEATURING Margaret H. Steinbach , Mike Gitlin & David A. Hoag

Is Aggressive Central Bank Intervention Working?

Quantitative Easing on Turbocharge in Major Economies

In response to the global financial crisis and the muted growth that persists years later, central banks across the globe have aggressively expanded their balance sheets using a range of both traditional and unconventional policy tools. As of the end of June, the combined balance sheets of the U.S. Federal Reserve, European Central Bank and Bank of  Japan totaled over $12.1 trillion — a  283% increase since June 2007. Never before have the balance sheets of the central banks of these major economies  been so inflated.

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INVESTMENT INSIGHTS  |  September 2016  |  FEATURING Margaret H. Steinbach , Mike Gitlin & David A. Hoag

How to Invest in the Post-Post-Crisis

U.S. Economy: Not an Environment for Aggressive Monetary Policy Tightening

It’s been said, and feared, for years that U.S. interest rates will quickly rise once the Federal Reserve starts to reverse course, resulting in declines in the prices of fixed income securities. Since the infamous “Taper Tantrum” in mid-2013, the Federal Reserve has been carefully trying to step away from the unprecedented easy money policy it has employed since the financial crisis. Yet, the power of the U.S. to  act in isolation has diminished over the past decade.

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Fed Rate Decision: Liftoff at Last, but No Cause for Panic

  • The Federal Reserve has increased interest rates, as it appears confident about the U.S. labor market recovery, domestic inflation expectations and gradual economic recovery outside the U.S.
  • While the Fed has not laid out its precise path for normalization, it has stressed a careful approach to increasing rates, which may imply that this tightening cycle will be slower than past ones.
  • Although some areas of the bond market may lag in a rising rate environment, the income investors earn from bonds should benefit from higher yields going forward.
  • The impact on equities is more mixed, with some sectors benefitting as the economy continues to strengthen and others facing a headwind from higher financing costs.

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Slower Path to Higher Interest Rates

Lower for Longer U.S. interest rates have remained low for extended periods at several junctures in U.S. history

Source: Thomson Reuters Datastream. As of September 30, 2015.

  • The key question facing U.S. monetary policy is not whether the Federal Reserve will raise interest rates this year or next, but how far it can go given mixed economic conditions in the U.S. and intensifying financial pressures around the world.
  • Many are questioning whether the U.S. economy is strong enough to absorb a meaningful rise in rates — even 100 basis points — over the next couple of years, especially against the backdrop of weakness in Europe and emerging markets.
  • In the U.S., low inflation, slowing job growth and a strong dollar are the crucial factors that should prompt the central bank to move slower than market expectations.
  • Overall, we expect U.S. interest rates to remain suppressed for the foreseeable future, especially against the backdrop of cautious and measured Fed policy.

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November 2015
 |  FEATURING Wesley Phoa, PhD.

Why Own Bonds in a Rising Rate Environment?

A portfolio manager discusses reasons to own bonds in a rising rate environment in the context of investor objective.

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MARKET COMMENTARY  |  September 2015

Fed Rate Decision: Near-Zero For Now, But Higher Soon?

  • The Federal Reserve has decided to keep interest rates close to zero, as concern about global economic conditions cast a shadow over an otherwise fairly bright outlook for the U.S. economy.
  • Looking forward, the Fed is expected to raise rates gradually, and an increase of 0.25%, for example, would be unlikely to have a significant impact on the economy.
  • Over time, higher interest rates can be beneficial for bond investors, enabling reinvestment in issues offering higher yields.
  • Rising rates have a varied impact on stocks. Selective investors who emphasize company-specific research should continue to find attractive longer term income and return opportunities.

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INVESTMENT INSIGHTS  |  September 2015  |  FEATURING Stephen Green & Andrew H. Dougherty

The China Syndrome: Meltdown or Recovery Ahead?

The Rise and Fall of China’s Stock Market

A powerful rally in Chinese stocks — and a subsequent sharp decline — were driven primarily by government statements and policy measures, including a series of interest rate cuts. China’s central bank cut rates again in late August and eased reserve requirements on banks.

Source: Wind Financial

A sharp selloff in China’s stock market, a surprise currency devaluation and a persistent slowdown in economic activity have raised doubts about the ability of the world’s second-largest economy to maintain the hypergrowth levels of the past two decades.

Against this backdrop, economist Stephen Green and China affairs specialist Andrew Dougherty discuss:

  • The outlook for China’s economy, which remains generally positive over the long term
  • The origins and potential implications of China’s stock market correction
  • Segments of the economy that are poised for growth despite an overall slowdown in activity
  • China’s uneasy shift toward a market-based foreign exchange regime

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INVESTMENT INSIGHTS  |  August 2015  |  FEATURING Hilda L. Applbaum

Who Wins in a Rising Rate Environment?

In a Low-Yield Environment, Income Stocks Remain in Demand

Heading into the sixth year of an equity bull market, U.S. stocks appear expensive in most sectors. Valuations for traditional dividend-paying sectors, including basic materials, consumer staples and utilities, are high both on a relative and an absolute basis. A notable exception is the telecommunications sector, which hasn’t benefited quite as much from the global search for yield.
Source: FactSet. As of 5/29/15.

Portfolio manager Hilda Applbaum discusses income investing

With central banks around the world aggressively suppressing interest rates, the challenge of finding reliable income-producing investments has never been greater. Few investors are more familiar with this dilemma than portfolio manager Hilda Applbaum, the principal investment officer of The Income Fund of America®. In this conversation, Hilda shares her perspective on:

  • Income-oriented investing in a market where the prospect of higher rates looms large
  • The emerging role of information technology companies as high-quality dividend payers
  • The sustainability of corporate profits and expectations for P/E expansion
  • Finding income opportunities in an aging bull market

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July 2015
 |  FEATURING Gerald Du Manoir & Matt Miller

Evolving Japan Now Offers Intriguing Opportunities

A portfolio manager discusses the recent evolution among some Japanese companies toward a more shareholder-friendly management strategy.

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Oil Price Declines Could Have Far-Reaching Effects

It Isn’t Just Shale: Oil Production Growth Is a Global Phenomenon

While U.S. shale has certainly contributed to a steady rise in global supply, non-OPEC supply growth has also been robust in the face of increasing production from Saudi Arabia.

Annual World Oil Production, 1980–2014

Source: U.S. Energy Information Administration. Data for OPEC, Saudia Arabia and World production as of September 30, 2014. Data for U.S. production as of December 16, 2013. U.S. figures for 2013 and 2014 are forecasts.

Analysts and Portfolio Managers Weigh Valuations Amid Ongoing Volatility

In 2014, oil prices posted their largest annual decline since the global financial crisis, losing more than 45% as weaker demand and strong global crude output created a supply glut. The collapse saw prices at a five–year low, battering energy shares — which finished 2014 nearly 13% lower — and weighing heavily on financial markets in oil–exporting countries. In our view:

  • Oil prices could continue to remain low — and may even continue to decline — before supply–demand imbalances are corrected.
  • Some oil companies have begun to show signs of better capital discipline, but many have room to improve.
  • Despite lower prices in the near term, demand fundamentals over the longer term should remain supportive of higher oil prices.
  • Market declines may provide some attractive entry points for investors.

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INVESTMENT INSIGHTS  |  January 2015  |  FEATURING Frank C. Hu

An Analyst’s Perspective: Do Low Oil Prices Put Dividends in Jeopardy?

Oil Companies Have Been a Healthy Source of Dividends Globally

In 2014, the oil industry was the second-largest payer of dividends after financials, contributing 13% of the dividends paid by companies in the MSCI All Country World Index. Royal Dutch Shell and Exxon Mobil were among the largest dividend payers of all index constituents.

Source: FactSet, as of December 31, 2014.

* Figures may not total 100% due to rounding. 

Market declines may provide some attractive entry points for investors.

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