While our focus at Global Income Edge is on dividend paying stocks, we're also firm believers in diversification. So we maintain a list of mutual funds focused on international income, should you choose to diversify beyond the recommendations in our two portfolios.
While funds are more expensive to own than individual stocks, these funds' solid track records make them worth the added expense.
Here is a summary of the funds we recommend:
American Funds Capital Income Builder is designed as a one-stop option for global investors, holding a mix of U.S. and international stocks, as well as bonds.
American Funds outsources the fund's management to Capital Research and Management Company (CRMC), one of the largest fund management companies in the world with about $1 trillion in its charge. CRMC has team of more than 25 analysts that supports the fund's nine managers, researching stocks and bonds the world over to identify attractive buying opportunities.
That collective wisdom has led the fund to take a fairly defensive stance, with 15.3% of its cash under management devoted to consumer staples names. Another 13.3% is allocated to health care, with a further 14.6% to utilities. All of those sectors tend to stand up well to market weakness given the predictable nature of their businesses, a move which makes sense considering the many pockets of weakness in global economic growth.
Europe is still flirting with recession as the region's central bank continues to talk up stimulus measures; China's economy is now believed to be growing at its slowest pace in years; and the economies of South America have become a dichotomy of haves and have-nots. Another nod to safety is the fact that 91.4% of the bonds held by the fund are U.S. issues, as are 55% of the fund's stocks.
Despite its defensive nature, with a yield of 4.7% the fund pays out dividends at a rate nearly twice the S&P 500, and it is slightly less volatile than similar funds. It also has an edge in terms of cost, charging a low annual expense ratio of 0.61%. With nearly $97 billion of assets under management, it clearly takes full advantage of its economies of scale.
The fund's strategy is clearly a winner, ranking in the top 6% of its peer group over the trailing year, the top 14% over the past five years and in the top quarter over both 3-year and 10-year terms.
Running a close second in terms of yield Goldman Sachs Income Builder A.
Managed by an internal team of five managers backed by a number of analysts, the fund is something of a departure from the American Funds offerings. Rather than taking a defensive posture in terms of sector allocation, nearly 24% of its assets are allocated to financial services companies, 17.4% to energy and 11.2% to industrials. That's not quite as risky as its sounds though, with more than 70% of its bond holdings being U.S. issues, as are nearly 87% of its stocks. While the energy exposure is probably somewhat risky given plunging oil prices, financials should fare well as interest rates rise and industrials will get a boost from solid U.S. economic growth.
The fund has a low beta of 0.84, making it less volatile then American Funds Capital Income Builder but more expensive with an expense ratio of .97%. And while its yield is slightly lower at 4.4%, it outperforms American Funds as it ranks in the top 2% of its peer group on a 3- and 5-year basis and the top 8% over the trailing decade.
While Henderson Global Equity doesn't have the extended track record of the prior two funds, it is also a top performer ranking in the top 6% over the past year and top 5% over the past five years. It is also different in that it is an equity-only fund.
Sector-wise, the fund courts risk with nearly 14% of assets devoted to consumer discretionary stocks, 14.6% allocated to financials and 20.1% to communication services outfits. Only 21% of its assets go towards American companies, with about 55% devoted to Europe and 22.4% to Asia. That's not totally unexpected though, considering that the fund's two managers take a strict valuation approach and only invest in companies that pay outsized dividends. You obviously find those sorts of stocks in beaten down markets.
The results of that dual dividend-valuation strategy come through in the fund's yield, a whopping 6.2%. And while its beta is just 0.73 compared to other foreign value stocks funds, on an absolute basis it is significantly more volatile than either the American Funds or Goldman Sachs offerings given its exclusive focus on stocks. It is also more expensive with annual costs of 1.13%.
PIMCO Dividend and Income Builder A is another allocation fund, able to invest in both stocks and bonds. Currently though, just 6.4% of assets are in bonds, with 49.9% in US stocks and 39.7% in foreign stocks. But while it has a big 27.1% allocation to financial services, the remainder of its assets are fairly evenly spread across the rest of the stock sectors.
The fund pays a middling yield of 3.4% and is higher cost with an expense ratio of 1.41%. It also has a relatively limited track record, gaining 11.3% over the past three years to rank in the top 17% of allocation funds and the top quarter of the trailing year. It's also fairly volatile with a beta of 1.38.
While we would recommend the prior three mutual funds more highly, PIMCO Dividend and Income Builder A is an acceptable option if you have access to lower cost shares through a retirement plan or an existing relationship with the asset manager.
Finally, we come to WisdomTree Global Equity Income. It is an exchange-traded fund which you buy or sell through your broker like any other stock.
The fund launched in 2007 and has returned 5.5% over the trailing five years and 8.1% over the past three. That ranks it near the bottom of its world stock category, but it is relatively inexpensive with an expense ratio of 0.58%. It's also relatively low risk, with a beta of 0.88.
A good choice for those who prefer not to invest in traditional mutual funds, WisdomTree Global Equity Income offers relatively well-balanced global exposure and its quarterly dividend yields 5% annually.
This article originally appeared in the Income Without Borders column. Never miss an issue. Sign up to receive Income Without Borders by email.
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