PIMCO | Dividend and Income Builder Strategy Dividend Strategy

Dividend and Income Builder Strategy Dividend Strategy

PIMCO’s Global Dividend Strategies

Dividend-paying equities can be an attractive long-term opportunity for investors seeking current income, growth of income, and potential capital appreciation. To meet these goals, PIMCO offers two global dividend strategies: the PIMCO Dividend and Income Builder Strategy and the PIMCO Dividend Strategy.

The PIMCO Dividend and Income Builder Strategy is a global, integrated strategy aimed at delivering an attractive yield today, potential for a growing income stream over time and long-term capital appreciation. The PIMCO Dividend Strategy invests exclusively in dividend-paying equities, while the PIMCO Dividend and Income Builder Strategy invests in both equities and select fixed income securities.

Brad Kinkelaar and Cliff Remily, two experienced investors with expertise in dividend investing, manage the strategies. Their time-tested investment approach focuses on undervalued companies that pay an attractive dividend today and have the potential ability and willingness to increase dividend payments over time. The strategies are grounded in fundamental security research, enhanced by PIMCO’s global resources and macroeconomic expertise, and strengthened by our unique approach to portfolio construction.

Dividend-Paying Stocks are a Compelling Asset Class

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.

Investment Philosophy and Approach

Our investment philosophy emphasizes dividend growth, disciplined valuation, a global opportunity set, and a flexible, highly active approach.

We focus on dividend growth, not just current dividend yield, because we believe the key to success in dividend investing is to assemble a portfolio of companies with the ability and willingness to increase dividend payments. We seek to invest in companies that not only pay an attractive dividend today, but also have the potential to grow their dividend payments over time amid a broad range of economic scenarios. Because we pursue capital appreciation in addition to an attractive current yield, we employ a disciplined valuation framework and seek to purchase companies at a reasonable price, or valuation.

Our opportunity set is global because we believe compelling dividend opportunities are best found without a regional or home-market bias. Dividend cultures around the world vary greatly, and in some regions companies have traditionally tended to use free cash flows to make acquisitions, buy back shares, or reinvest in their businesses. Our global approach also enables us to better diversify our portfolio beyond traditional sectors such as utilities and telecommunications services. Finally, being global allows us to invest in the most attractively valued dividend-paying companies.

Our approach also is flexible and highly active. As we search out the best income opportunities from around the world, we remain benchmark aware, not benchmark constrained, regarding sector, country, and security weights. As a result, our “active share” (i.e., the percent of our portfolio that is different from the benchmark) is typically quite high. We believe that our highly active, global, flexible approach allows us to position our portfolio for long-term investment results.

Investment Process

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.

Experienced Dividend Investors

The PIMCO Dividend Strategies are managed by Brad Kinkelaar and Cliff Remily, both experienced dividend investors. They work closely with Eve Tournier, who actively manages the fixed income investments of the PIMCO Dividend and Income Builder Strategy. The Dividend team also includes three equity analysts. This contrasts with other firms, where dividend strategies may be run as a subset of a more general value strategy.

Importantly, each member of the Dividend team is a global generalist, not a sector specialist. We believe this structure provides a tremendous advantage for managing a global strategy, as each team member has perspectives across geographies, asset classes, and sectors. It allows each team member to participate in the investment process and add to discussion and debate about not just whether an investment idea is a good company, but whether it will enhance the entire portfolio. This generalist orientation also helps the team avoid inherent biases that can come with a narrow sector focus.

PIMCO’s Approach to Managing Equities

PIMCO’s approach to active equity investing focuses on providing investment solutions where we believe we can provide a unique value proposition for investors, rather than attempting to be “all things to all people.” This starts with not being constrained by a traditional equity “style box” approach, nor by strict adherence to investing in relation to any given benchmark. PIMCO’s insights into the factors that drive the world’s economies and businesses, as well as the firm’s time-tested capabilities in income and fixed income investing, will serve as an important complement to the strategy’s bottom-up company analysis.

Applications for the Strategy

We believe a global dividend portfolio that aims to generate an attractive current yield and long-term capital appreciation is compelling for many investors and can be employed as part of a core equity allocation. Dividend income can be a key component of overall equity returns and may be particularly important for plan sponsors with needs for liquidity or income to meet current liabilities. In our view, an actively managed portfolio of dividend-paying equities can serve as an attractive source of income growth that can potentially outpace inflation.

¹Our analysis of historical equity market index returns is based on the S&P 90 from 1928 to 1957, and the S&P 500 from 1957 to 2010, using data and methodology from Kenneth R. French and Robert Shiller.

²MSCI Barra, “What Drives Long-Term Equity Returns?” January 2010
³Standard & Poor’s, Ibbotson. Data is for the S&P 500.

⁴For example, Robert D. Arnott and Clifford S. Asness, “Surprise! Higher Dividends=Higher Earnings Growth” covering companies in the S&P 500 from 1946 to 2001; published 2003, Financial Analysts Journal.

How To Invest

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.

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