Income stars back US consumer despite softer spending

Fund managers in the US equity income space are favouring stocks in the consumer sector despite slower consumer spending seen in the past month.

Clare Hart, manager of the £420m JPM US Equity Income fund, and Rebecca Young, running the £3.3m Neptune US Income fund, have been adding to or are overweight consumer sectors due to the dividends available and "oversold" shares.

However, US consumer spending barely rose in October, despite an increase in disposable incomes. The US Department of Commerce said consumer spending was up just 0.1%, lower than the 0.4% forecast.

Hart said: "Within the US Equity Income portfolio, we have been adding to the consumer space, which seems counterintuitive given the stresses on the consumer, but there are companies which have been oversold."

The Neptune fund is overweight consumer discretionary and consumer staples which Young said are defensive, as well as interesting from a stock specific point of view.

"We hold Limited Brands, a company which is doing increasingly well thanks to its Victoria's Secret arm. It is growing store sales, has great advertising and, even though there are headwinds for the consumer, it is carving out a niche for itself. It is also growing internationally and there is good dividend growth," she said.

Both managers believe more investors will turn to the US as the search for income becomes more difficult in traditional yielding sectors.

"US publicly traded companies, bolstered by record profits and significant cash hoards, are increasing their dividends at the fastest pace in seven years," said Hart.

"So far this year, 226 companies have upped their dividends, while only four have cut theirs."

She added on a dollar basis, corporations added $39.8bn to dividends in the past three quarters, which is 50% above the $26.5bn added for all of 2010.

Young said she is especially optimistic about companies in the technology sector, which are introducing dividends for the first time, and financials are being given the green light to restart their payouts.

"Dividend growth will be a prominent feature of the US market in the future," she said.