PIMCO Extends Its Dividend Suite With Two New Regional Strategies
- As is the case with our other dividend strategies, we are unconstrained by benchmarks and focused on generating yield and capital appreciation by finding attractively valued companies that pay appealing dividends today and have an ability and willingness to grow dividends over time.
- We have assembled high-conviction portfolios with high active share – an indication that a portfolio meaningfully differs from its benchmark.
- Although these strategies have a regional focus, our research takes a global perspective, with a team of global generalist equity analysts dedicated to dividend strategies.
Q: What are the PIMCO U.S. Dividend and PIMCO International Dividend Strategies?
Kinkelaar: These are natural offshoots of what the PIMCO dividend team has been doing for the last three years, and what I’ve been doing as a global dividend investor since 2002. We’ve subdivided the global space into two additional regional strategies – one focused on U.S. equities, the other on securities outside of the U.S. Both use the PIMCO dividend team’s time-tested investment process: Unconstrained by benchmarks, we focus on finding attractively valued companies that pay appealing dividends today and have an ability and willingness to grow dividends over time.
Q: Why consider an investment in these strategies now? What are the key benefits?
Muller: First, in our view, equities are generally an attractive asset class given low rates with low inflation and moderate expansion in the U.S., as well as quantitative easing in Europe and Japan. Second, in a world of low interest rates, equities still provide investors the opportunity to earn an attractive income stream through dividends that could grow over time. Third, we focus on total return: The equities we select for our portfolios must also be attractively valued with the prospect of capital appreciation. We believe dividends are a key element of total equity return and provide valuable insight into a company. They can indicate how a management team thinks about capital allocation, which is one of the most important jobs of a CEO and CFO. In our view, companies that give capital back to shareholders and have a willingness and desire to increase dividends as the company grows earnings will tend to invest in higher-return projects. This can create a virtuous cycle in which a company grows, its dividends grow, and total return potential is attractive.
Q: How have dividend-paying stocks performed historically? How might they do going forward, particularly if interest rates rise?
Kinkelaar: It’s well known that stocks with higher-than-average yields have outperformed markets over long periods of time. It’s less well known that companies that have not only a higher-than-average yield but also have grown their dividends at an attractive rate have significantly outperformed stocks characterized solely by higher yields. Yield and growth are not mutually exclusive, as many people believe; in fact, when you get both, the long-term results can be superior.
Recently, the market has favored the highest-yielding stocks over dividend growers, which is typical of when interest rates fall. But if markets lose some momentum going forward, as we expect, a value-based dividend growth strategy is likely to shine. This is important because many stocks with high dividend yields also have lofty valuations and are more bond-like, and thus convey heightened interest rate risk. We look to build equity portfolios with higher dividend yields that benefit from economic growth while attempting to manage the downside risk if yields begin to rise.
Muller: Although interest rates fell in 2014 and have fallen further to start 2015, the specter of a rising-rate environment remains an important consideration. The key is the pace of any increases. In a normal rising-rate environment, what really matters is why rates are rising. Given central bank activity since the financial crisis and low inflation, I think it’s a fair assumption that if rates increase, it would be because of economic growth. And given our very conscious decision to be exceptionally careful around bond-like equities – which would be those most likely to be negatively affected by an increase in rates – I believe the growth potential embedded in our portfolio should offset any perceived decrease in the value of the dividend streams due to increased rates. In fact, given the composition of our portfolios, I think our strategy is well positioned should rates rise on a gradual and normal path.
Q: What’s unique about these strategies?
Kinkelaar: As is the case with our other dividend strategies, we have the flexibility to play both offense and defense – unlike many dividend strategies that are more defensive and thus more interest-rate sensitive. Ours is a diverse strategy: On one hand, we can invest in basic value and emerging franchises – i.e., companies with cyclical or secular growth characteristics, respectively. On the other hand, we can invest in more defensive opportunities: solid blue-chip companies with recurring streams of revenue, or what we call consistent earners. In our opinion, the flexibility to own a broader range of business types is a major differentiator; we seek to create value over time, preserve investors’ capital and participate in growth at different phases of the economic cycle.
We also have assembled high-conviction portfolios with high active share – an indication that a portfolio meaningfully differs from its benchmark. The PIMCO U.S. Dividend Strategy intends to invest in 25–35 dividend-paying stocks, while the PIMCO International Dividend Strategy intends to invest in 40–80 stocks.
While each of these new strategies will have a regional focus, our investment research takes a global perspective, with a team of global generalist equity analysts dedicated to dividend strategies. This is a fairly unique perspective in the dividend space.
Q: What is your investment process?
Muller: Put simply, it’s a bottom-up, scenario-driven process that carefully evaluates risk/reward opportunities. Although the future is by definition uncertain, we spend a significant amount of time trying to understand the range of potential outcomes. If the range of possible and probable outcomes is favorable and we believe the stock is attractively priced, it is a candidate for our portfolios.
Becoming part of any of our dividend portfolios, however, involves overcoming some high hurdles. There are more than 2,000 companies globally that we could potentially invest in. We travel the world and meet with hundreds of companies every year. And in a rigorous, repeatable and disciplined process, we create highly detailed and flexible models that stress-test different scenarios and sensitivities. Yet in the end, only about 100 securities make the cut for inclusion across all of our dividend strategies – and, of course, even fewer in the PIMCO U.S. and International Dividend Strategies.
Q: What experience do you have in managing these strategies? How does the team operate?
Kinkelaar: I’ve been in the business for 18 years now and managing dividend strategies since 2002, including more than three years at PIMCO. I head PIMCO’s dividend team and serve as a rotating member of PIMCO’s Equity Investment Committee. Adam has been working on dividend strategies since joining PIMCO in 2012. Previously, he managed a value-oriented long/short investment fund and worked in investment banking. Adam and I, along with other portfolio managers and analysts, work closely as a team on our Global Dividend Strategy (formerly PIMCO Dividend Equity Strategy) as well as our mixed-asset income strategies, including the PIMCO Dividend and Income Builder Strategy.
Q: How might investors deploy these strategies in their portfolios?
Kinkelaar: In general, any of the products in our dividend suite can be used as a total return strategy, as a value strategy or as an income-generating strategy. Now, with the addition of our two regional strategies focused on U.S. and non-U.S. securities, they can also be used for region-specific exposure. But, as noted above, the flexibility of our strategies allows us to be much more than yield vehicles. We believe these strategies should be considered as core elements of an investor’s equity allocation. The search for yield is an ongoing challenge in this environment, and the potential to generate above-average yields without having to sacrifice attractive long-term total return characteristics should appeal to many investors.
All investments contain risk and may lose value. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Dividends are not guaranteed and are subject to change and/or elimination. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.
This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world.
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