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Dividend investing has long been a compelling investment opportunity. Dividend-paying stocks have historically outperformed the equity market as a whole, and dividend income has been the less volatile component of global equity returns relative to capital appreciation (or depreciation).1,2 Dividend income accounted for a quite significant 43% of equity total returns from January 1926 to December 20123. In addition, a growing dividend stream may be a powerful hedge against inflation. PIMCO believes that global dividend investing is a compelling investment opportunity, particularly now with 10-year U.S. Treasury yields at historical lows. In addition to attractive current income, many global stocks offer the potential for dividend growth and capital appreciation. Given PIMCO’s secular outlook for lower expected returns in general, we believe that dividends will be a significant driver of total returns going forward. Indeed, without broad multiple expansion or an economic tailwind, we believe dividends are likely to make up the majority of equity total returns over the secular horizon. Investors who seek capital appreciation in addition to current income may be hesitant, however, to invest in a dividend strategy. They may equate dividend-paying companies with mature businesses that lack growth opportunities. In fact, the opposite is often true. Studies show that companies that have paid higher percentages of their earnings in dividends to shareholders tend to grow earnings faster than those that retain more in cash4. This may be because companies with stronger dividend paying cultures tend to make capital-allocation decisions that are designed to increase earnings and may lead to higher share prices. With this is mind, the PIMCO Dividend and Income Builder Strategy or the PIMCO Dividend Strategy can be an important investment solution for investors seeking total return from both income and capital appreciation.
Our consistent, bottom-up investment process is grounded in fundamental security research, enhanced by PIMCO’s global resources and macroeconomic expertise, and strengthened by our unique approach to portfolio construction. Our process begins with a global investment universe of more than 2,000 equity securities that meet certain dividend, size, and liquidity criteria. To narrow down this broad universe, we travel extensively to visit companies, meet with industry experts, and attend research conferences. This, combined with our proprietary screens, helps us assemble a focus list of high-potential investments comprised of companies subjected to rigorous fundamental analysis. In this analysis we subject every company to a common analytical framework – a repeatable, rigorous, and deep research process consistently applied to the portfolio holdings. We project fundamentals such as earnings, cash flow, and dividend growth in base case, upside case, and downside case scenarios. Wall Street analysts often assess only a narrow range of potential outcomes and underestimate the downside. Our detailed upside and downside stress testing helps us understand the wide range of possible and probable future outcomes. This analysis is an important element of our fundamental research that we believe contributes to limiting losses in market downturns.Once we have assessed a company’s fundamentals, we analyze its price relative to its overall risk-reward profile. As we seek to gauge whether a stock is overpriced or underpriced, we assess its current and historical valuation, both absolute and relative to the broad market. We perform this analysis using various industry-appropriate valuation metrics such as price-to-earnings and price-to-book. We believe that a disciplined assessment of valuation is critical to potential capital appreciation.Our entire investment process is enhanced by PIMCO’s extensive global resources and macroeconomic insights. For example, we frequently use PIMCO’s proprietary credit research to help us better understand a company’s entire capital structure. At a higher level, the firm’s forums and macroeconomic insights, as well as our participation in PIMCO’s Investment Committee, inform our understanding of how macroeconomic dynamics may affect individual companies.We strongly emphasize the portfolio construction process, integrating our thoroughly researched equity investment ideas with PIMCO’s macroeconomic views as we seek to construct a diversified portfolio that will provide attractive yield and capital appreciation. While we diversify across sectors and countries, we believe that sector and country weights provide an incomplete picture of how a portfolio is likely to behave. We therefore seek to diversify across different types of businesses. In fact, diversification across business types is a hallmark of our investment process. We invest in three types of businesses that are classified according to their life cycle of development: Consistent Earners (blue-chip industry leaders that have the potential to create value year after year), Basic Value companies (traditional value companies such as cyclicals, turnarounds, and companies with low valuations), and Emerging Franchises (companies with the potential to be significantly larger over time). Our exposures to each of these business types, as well as fixed income in the case of the PIMCO Dividend and Income Builder, will vary throughout the business cycle and be influenced by PIMCO’s macroeconomic outlook. We believe that our integrated approach allows us to build a global portfolio of well-positioned companies with strong growth prospects and the potential to meet our goals of paying an attractive current dividend and participating in capital appreciation.
Past performance is not a guarantee or a reliable indicator of future results. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Dividends are not guaranteed and may be subject to change and/or elimination. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. 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. Statements concerning financial market trends are based on current market conditions, which will fluctuate. 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.
The MSCI All Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. Since June 2007 the MSCI All Country World Index consisted of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The index represents the unhedged performance of the constituent stocks, in US dollars. Barclays Global Aggregate (USD Unhedged) Index provides a broad-based measure of the global investment-grade fixed income markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian Government securities, and USD investment grade 144A securities. The The S&P 500 Index is an unmanaged market index generally considered representative of the stock market as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. It is not possible to invest directly in an unmanaged index.
This material contains the current opinions of the manager 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. ©2013, PIMCO.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2014, PIMCO.
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