By Philip van Doorn, MarketWatch
Income-seeking investors in the U.S. are used to companies paying quarterly dividends. But many companies outside the U.S. pay annually or twice a year. Ben Lofthouse takes advantage of that timing to help the Janus Henderson Global Equity Income Fund achieve higher yields.
The $5.9 billion Janus Henderson Global Equity Income Fund’s class I shares /zigman2/quotes/209472084/realtime HFQIX +1.79% have a four-star rating from Morningstar and a 30-day SEC yield of 3.62%.
But the 30-day yield doesn’t always provide a realistic estimate of how high a fund’s dividend yield will be for an entire year. Many of the stocks held by this fund pay only once or twice a year. This means the fund’s income and its quarterly yield are higher during the second quarter and the fourth quarter than the first and third quarters.
During an interview, Lofthouse described a “regional rotational strategy” to enhance the fund’s yield. The fund’s portfolio yield (expected annual income divided by assets) “is more in the area of 4.5% to 5%,” he said, but he expects the strategy to result in a dividend yield of about 6% for all of 2018.
The fund achieves the higher yield by buying and selling shares of companies (and paying very low commissions) to take better advantage of the timing of their dividend payouts. Lofthouse said that while rotating stocks, the fund holds them for at least 60 days so that the dividends are treated as “qualified income” under U.S. tax laws. That translates into a lower federal income-tax rate on the dividend income for most investors.
Examples of attractive dividend stocks
“We look for companies where the balance sheet is secure, free cash flow is high and the business is stable,” Lofthouse said. A company’s free cash flow is its remaining cash flow after planned capital expenditures. The money can be used to pay dividends, repurchase shares, make acquisitions or for any other corporate purpose.
He named the following five stocks as particularly attractive:
|Company||Ticker||Country||Industry||% of fund as of April 30||Dividend yield||Total Return - 2018 through May 30||Total Return - 3 Years|
|Total S.A.||/zigman2/quotes/206172043/delayed FR:FP||France||Integrated Oil||3.0%||4.93%||14%||33%|
|BP PLC||United Kingdom||Integrated Oil||3.1%||5.23%||13%||56%|
|Lloyds Banking Group PLC||/zigman2/quotes/202285510/delayed UK:LLOY||United Kingdom||Major Banks||1.7%||4.75%||-3%||-16%|
|ING Groep NV||/zigman2/quotes/203351007/delayed NL:INGA||Netherlands||Financial Conglomerates||2.6%||5.30%||-15%||-2%|
|Taiwan Semiconductor Manufacturing Co. ADR||/zigman2/quotes/204359850/composite TSM||Taiwan||Semiconductors||1.9%||3.50%||-3%||71%|
|Source: Janus Henderson Investors, FactSet|
For Taiwan Semiconductor’s American depositary receipts (ADRs), the yield shown is based on the company’s estimate that its annual dividend for 2018, to be paid in June, will be $1.34. That is a yield of 3.50% based on the May 30 closing price of $38.34. All other yields are based on companies most recently announced dividends, according to FactSet.
The fund bought the other four stocks on their local stock exchanges. However, they also have U.S. ADRs for all: Total S.A. /zigman2/quotes/201824152/composite TOT +0.75% , BP /zigman2/quotes/207305210/composite BP +0.70% , Lloyds Banking Group PLC /zigman2/quotes/200709414/composite LYG +0.47% and ING Groep NV /zigman2/quotes/200709414/composite LYG +0.47% .
Lofthouse said the extended period of low oil prices had forced Total and BP “to become better operators,” bringing down their break-even points for oil production to about $45 a barrel from what he said was $80 to $90. Brent Crude oil for July delivery now trades for about $78 a barrel.
The dividend yield for Taiwan Semiconductor Manufacturing Co. isn’t particularly high, but the company has raised the payout significantly each of the past four years. Lofthouse touted the increasingly high barriers to entering the microchip manufacturing business and Taiwan Semiconductor’s varied customer base. The company isn’t overly tied to any one product type or brand, he said.
Lofthouse said the fund was “overweight” several sectors, with about 12% of the portfolio in energy, another 12% in banks and 7% in materials.
Here are the fund’s 10 largest holdings as of April 30 . About 9% of the fund was invested in North America at that time, while more than 80% was invested in European stocks.
|Company||Ticker||Country||Industry||% of fund||Dividend yield||Total Return - 2018 through May 30||Total Return - 3 Years|
|Nestlé S.A.||NESN-CH||Switzerland||Food: Major Diversified||3.4%||3.12%||-7%||13%|
|GlaxoSmithKline PLC||GSK-UK||United Kingdom||Pharmaceuticals||3.1%||5.25%||19%||25%|
|Royal Dutch Shell PLC Class A||RDSA-NL||Netherlands||Integrated Oil||3.1%||5.38%||10%||35%|
|BP PLC||BP-UK||United Kingdom||Integrated Oil||3.1%||5.23%||13%||56%|
|Deutsche Telekom AG||DTE-DE||Germany||Telecommunications||3.1%||5.25%||-6%||-4%|
|Total S.A.||FP-FR||France||Integrated Oil||3.0%||4.93%||14%||33%|
|Imperial Brands PLC||IMB-UK||United Kingdom||Tobacco||2.7%||6.53%||-12%||-8%|
|Pfizer Inc.||PFE||United States||Pharmaceuticals: Major||2.7%||3.77%||1%||16%|
|British American Tobacco PLC||BATS-UK||United Kingdom||Tobacco||2.6%||5.12%||-23%||17%|
|ING Groep NV||INGA-NL||Netherlands||Financial Conglomerates||2.6%||5.30%||-15%||-2%|
|Sources: Janus Henderson Investors, FactSet|
ADRs for other locally purchased non-U.S. companies on the list include GlaxoSmithKline /zigman2/quotes/209463850/composite GSK +0.36% , Royal Dutch Shell PLC Class A /zigman2/quotes/205095589/composite RDS.A -0.05% , Imperial Brands PLC /zigman2/quotes/206232937/delayed IMBBY +2.13% and British American Tobacco PLC /zigman2/quotes/210207837/composite BTI +2.14% .
The Janus Henderson Global Equity Income Fund has three share classes. The class I shares have no sales charge and the lowest annual expenses. Here’s how that class of shares has performed through May 30 against the fund’s Morningstar category and the MSCI All Country World Index (ex USA):
|Total return - 2018 through May 30||Average return - 3 years||Average return - 5 years||Average return - 10 years|
|Janus Henderson Global Equity Fund - class I||-4.1%||4.0%||5.4%||4.2%|
|Morningstar Large Value category||-2.4%||3.3%||4.4%||1.5%|
|MSCI All Country World Index ex USA (U.S. dollars)||-2.2%||4.6%||5.2%||1.8%|
The fund’s returns are net of expenses, which are 0.78% annually for the class I shares, an amount Morningstar considers “below average.” But the returns don’t reflect any additional fees charged by financial advisers. If your adviser takes 1% of your account each year in fees for managing your money and the fund’s 2018 yield is 6%, as Lofthouse estimates, you’re handing 17% of your income to your adviser. You then may want to consider negotiating a lower adviser fee or start shopping around.