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Pick your positions in the U.S.

KEY TAKEAWAY

Stocks of companies that have been able to grow their dividends consistently look attractive in an environment likely to feature higher volatility and rising (if slowly) interest rates.

The U.S. economy remains on decent footing, but returns on stocks have leapt ahead of fundamentals. The S&P 500 has risen more than 60% from its peak in 2007, roughly three times the increases in U.S. nominal GDP and corporate earnings over the same period. Returns have been fueled not by earnings growth, but by an investor willingness to pay more for each dollar of earnings (otherwise known as multiple expansion) and by robust share buybacks.

STOCK MARKET RETURNS HAVE OVERREACHED
Percent Change Since Previous Equity High, 2007–2016

Graph: Stock market returns have overreached
Sources: BlackRock Investment Institute, S&P, U.S. Bureau of Economic Analysis, data from October 2007-June 2016. Notes: The chart shows the percentage change since the peak of the last equity cycle in October 2007 for S&P 500 total returns, trailing earnings per share and U.S. nominal GDP growth.

Future returns will depend on a resumption of earnings growth. Indeed, absent stronger fundamentals, markets will be vulnerable if or when the Fed raises interest rates.

DIVIDEND GROWERS HAVE LED WHEN RATES RISE
Average Compounded Returns During Periods of Rising Rates

Graph: Dividend growers have led when rates rise
Source: BlackRock Investment Institute. Notes: The chart shows the average annualized performance of dividend stocks during six periods of rising interest rates from 1990 through 2015 as measured by the 10-year U.S. Treasury bond. Dividend yield is represented by the 50 highest-yielding stocks in the S&P 500 on a monthly basis. Dividend growth is represented by the top 50 S&P 500 stocks we rank monthly by free cash flow to market value, 12-month dividend growth and low dividend payout ratio.

One bright spot in the U.S.: dividend growers. A company’s ability to increase dividend payments consistently over time points to diligent cash management and a sound business model, characteristics that also tend to beget lower volatility. Dividend growers also boast more attractive valuations than the highest-yielding stocks, which are at greater risk given their tendency to act like bonds and experience price declines when interest rates rise.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting blackrock.com/latamiberia. Read the prospectus carefully before investing.

In Latin America and Iberia, for institutional investors and financial intermediaries only (not for public distribution). This material is for educational purposes only and does not constitute investment advice or an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund or security and it is your responsibility to inform yourself of, and to observe, all applicable laws and regulations of your relevant jurisdiction. If any funds are mentioned or inferred in this material, such funds have not been registered with the securities regulators of Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain Uruguay or any other securities regulator in any Latin American or Iberian country and thus, may not be publicly offered in any such countries. The securities regulators of any country within Latin America or Iberia have not confirmed the accuracy of any information contained herein. No information discussed herein can be provided to the general public in Latin America or Iberia. The contents of this material are strictly confidential and must not be passed to any third party.

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