UK investors have traditionally questioned the dedication of US companies to paying dividends, believing instead that the management teams prefer to reinvest surplus cash in order to grow their business.However, Harris, vice president of US equity at the firm, thinks this is a massive misconception.
"European investors have tended to have a home-country bias when it comes to income," she said. "They are happy there, but I think they are missing out on some fantastic companies."
"Yes, dividends are not as high, but when you can combine that income with capital appreciation, I think you would be very foolish to simply overlook the US. Ignore US equity income at your peril."
Harris says there is some truth to the idea that US companies are more growth-oriented, and dividends on the market are lower, but she says that UK investors underestimate the income available.
"When you look back in 2012 at the overall return of the S&P 500, over 40 per cent of it came from income while the rest was down to capital appreciation."
"In 2011, the S&P would have had negative returns if it wasn’t for dividends."
FE Analytics data shows the S&P 500 returned 2.23 per cent in 2011 while the FTSE All Share lost 3.46 per cent.
Warnings have been sounded about the concentration of the UK sector in a handful of big stocks, and Harris says investing in the US offers a way to diversify this risk.
Harris continued: "I just don’t think it is something that is talked about, but in the S&P over 400 companies now pay dividends."
"There isn’t the concentration risk as you get in the UK, either. For instance, the top-10 stocks by dividend yield are only responsible for 7 per cent of our 2.1 per cent yield."
"In the UK equity income sector, they are at outrageous levels. You don’t get the concentration risk either because those yielding stocks are spread across sectors."
She says that UK investors have traditionally been keener on US corporate bonds, but equities are the better bet.
"I know UK investors who are looking for income funds have ignored the US in the past," she said.
"Investors have been getting their income from the US via fixed income and have felt they should get their blue chip security from a company’s bonds instead of its shares."
"However, as a result of the financial crash and the amount of QE, investors are coming round to the fact that there are so much more attractive opportunities in equities."
JPM US Equity Income’s top-10 holdings
| Top 10 holdings | Weighting (%) | Dividend yield (%) |
|---|---|---|
| Wells Fargo | 3.9 | 2.7 |
| Pfizer | 3.1 | 3.3 |
| Merck | 3 | 3.9 |
| Johnson & Johnson | 2.8 | 3 |
| ConocoPhillips | 2.7 | 4.4 |
| Verizon Communications | 2.6 | 4.2 |
| Exxon Mobil | 2.6 | 2.5 |
| Chevron | 2.3 | 3 |
| T. Rowe Price Group | 2 | 2 |
| Home Depot | 1.9 | 2.2 |
Source: JP Morgan
As the table shows, the JPM US Equity Income’s largest income contributor is the multi-national energy company ConocoPhillips, which has a yield of 4.4 per cent.
The fund’s top-10 holdings also include the bank Wells Fargo and car manufacturer Chevron.
JPM US Equity Income has a headline yield of 2.3 per cent, while the average fund in the IMA UK Equity Income sector is paying out 4 per cent.
Harris says that the objective of the fund is to combine both the stock's income and capital appreciation.
"We don’t have a set yield growth rate but we have three stages that each stock needs to pass," she said.
"Firstly, we look for quality companies that have good consistency of earnings and a strong management team."
"Valuations are next, so we look for companies are trading on a discount as we don’t want to over-pay."
"Then it is the dividend yield, which needs to be 2 per cent or more. We want to generate returns via income and capital appreciation," she added.
This approach to investing has so far proved successful on a total return basis, according to data from FE Analytics.
The £1.2bn JPM US Equity Income fund has returned 45.02 per cent over three years, which makes it the fourth best-performing fund in the IMA North America Sector over this time, and means it has beaten the S&P 500 by 7.33 percentage points.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The fund is also a top-quartile performer over one year, with returns of 22.14 per cent.
It was launched in December 2008 and is co-managed by Clare Hart and FE Alpha Manager Jonathan Simon.
Harris has a positive view on the future of the US equity market and thinks it will continue to leave the UK and European trailing.
"Valuations are not stretched," she said.
"In the consumer space, the increase in payroll credit tax, increased gas prices and the slowdown in tax refunds should have all squeezed consumers. But they didn’t."
"As things don’t look as bad, especially as first-quarter GDP figures were higher than previous expectations – though I wouldn’t say a 2 to 2.5 per cent growth rate is where an economy should be in the fourth year of recovery – the US is the best house in a bad neighbourhood."
"There has been talk of a market pull-back; however we have seen that it is already going on. There has been a 5 per cent pull-back in 45 per cent of the names in the S&P 500 over recent weeks."
"Volatility has gone away and trading volumes are calming down – the backdrop still looks encouraging for recovery, albeit in a lacklustre fashion," she added.
JPM US Equity Income requires a minimum investment of £1,000 and has an ongoing charges fee of 1.68 per cent.