Content provided by Joe Smith, CFA, CLS Senior Market Strategist
Low interest rates mean one simple thing: the search for yield and income is a very real and difficult challenge for investors. With many of the world’s economies offering low, zero, or even negative interest rates, the ability for investors to generate income in portfolios without taking on too much risk has become a real concern.
As rates have remained low, investors have pushed into stocks as a possible source of higher income. (The average dividend yield for U.S. stocks is around 2%, while the U.S. 10-year Treasury yields around 1.5%.) Although dividend yields in the U.S. are almost 0.5% higher than U.S. Treasuries, U.S. stocks look expensive, currently trading on average at a 26% premium. This means investors are likely taking more risk than necessary to capture that yield premium relative to bonds.
Instead, investors should take a more global approach to finding income. Why? International stocks currently offer a dividend yield of just over 3.1% in the aggregate, implying an additional income spread over U.S. 10-year Treasuries of 1.6%. In fact, 92% of the international equity markets offer dividend yields with more compelling spreads to the U.S. 10-year Treasury than U.S. stocks provide.
These dividend yields are even more compelling once investors factor in the price for stocks in these countries. On a composite, dollar-weighted average basis, stocks with dividend yield spreads to Treasuries greater than those for U.S. stocks are trading at a 35% discount. That means investors can source higher levels of income at more reasonable prices and with less risk of those stocks becoming overbought in the near future.
Key takeaway? Investors should look abroad to find additional sources for their income needs. A balanced and diversified approach to income can help investors overcome the challenges of sticking to U.S. stocks, which are now priced well above international, as a traditional source of income.
The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change. No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only.