The United States sharemarket isn’t all about the capital gains produced by the technology stocks which have dominated headlines this century. In fact, a number of companies can deliver worthwhile dividends on top of the industry diversification that offshore investing offers to Australians.

From 1926 to July 2023, dividend income constituted 32% of the monthly total return of the S&P 500. In some decades, such as the 1940s and 1970s, it even accounted for more than one-half of total returns – though during the 1990s that figure slumped to as little as 14% before rising again.  

The question for Australian advisers seeking to generate income from US stocks is twofold.  Which  companies pay decent dividends today and how can they be built into a portfolio? 

Unsurprisingly, the proportion of total shareholder returns attributable to dividends varies across sectors. 

“For example, sectors such as utilities, master limited partnerships, real estate and consumer defensive have historically focused more on paying higher dividends as opposed to other uses of capital such as share buybacks, acquisitions, or growth capital expenditures,” says Morningstar’s US Market Strategist, Dave Sekera. 

Stocks currently rated 4 or 5 stars by Morningstar that pay relatively higher dividends include telco Verizon Communication (7.8% trailing dividend yield at October 26), conglomerate 3M Co (6.7%), US Bancorp (6.1%), financial giant Morgan Stanley (4.6%) and pharmaceutical company Bristol-Myers Squibb Co (4%). 

Dividend royalty 

The S&P500 Dividend Aristocrats provides another snapshot of income-generating US blue chips. The equal-weighted index measures the performance of 66 S&P500 companies in 10 sectors that have increased dividends annually for the last 25 consecutive years. 

Its constituents include energy company Exxon Mobil, insurer Aflac, Caterpillar and Emerson Electric Co. Biopharmaceutical company AbbVie, defence contractor General Dymanics and technology giant IBM are also among the companies in the index. 

“Over the long term, the S&P 500 Dividend Aristocrats has outperformed the S&P 500 with lower volatility, as shown by higher risk-adjusted returns,” according to S&P Global analysts. 

“In addition, our analysis shows that the S&P 500 Dividend Aristocrats is sector diversified and displays growth and value characteristics,” they recently argued. 

Australian investors can access this index through the SPDR S&P Global Dividend Fund (ASX: WDIV), which had a dividend yield of 5.88% at 30 October and a one-year total return of 6.94% at 30 September. 

Several of the above companies can also be found in other exchange traded funds offering access to income-generating global equities. These include the Global X S&P500 High Yield Low Volatility ETF (ASX: ZYUS), which had a 12-month yield of 8.06% at September 29. 

Betashares Global Income Leaders ETF (ASX: INCM) at September 29 had a 12-month distribution yield of 4.4% and a portfolio of 100 companies from at least nine countries. Its biggest weighting was in US stocks (67.6%), followed by South Korea (5.4%) and Canada (4.2%). 

AI surprises 

Most high profile stocks leveraged to AI are absent from the list of high US dividend payers as they are obvious growth plays which have historically paid lower than average, or no, dividends. But there are exceptions to this rule worth noting.  

Taiwan Semiconductor’s American depositary shares, for instance, were in late October trading at an approximate 34% discount to Morningstar’s fair value estimate and had a trailing dividend yield of 2.1%, according to Sekera. 

He also points to “second derivative plays” in which AI will provide a tailwind, while also potentially generating income for investors. 

Real estate investment trust Digital Realty Trust is one example. It owns and operates over 300 data centres worldwide and the rapid growth in AI is providing a tailwind for additional computing and storage, he says.  

The stock was trading at an approximate 14% discount to Morningstar’s fair value estimate in late October and had a 4.2% trailing dividend yield. Both it and Tawain Semiconductor are holdings in the SPDR S&P Global Dividend Fund (ASX: WDIV). 

Crunching the numbers can show the impact of dividends on cumulative returns for investors. Excluding dividends, the return of the S&P 500 on January 1, 1930 would have grown to 214 points by the end of July 2023. But with dividends reinvested it would have compounded to the far higher level of 7,219, according to S&P’s analysis. 

Advisers have much to consider when constructing US equity portfolios. The ability of many companies to produce consistent dividends may mean that income can play a greater role in the equation than previously thought.