allocation seeks to provide equity-like returns with relatively less volatility than global markets . The portfolio includes both domestic and foreign equities — typically large , established companies with proven records of increasing dividends . In addition to dividend-paying stocks and bonds , the portfolio may contain other income-producing securities such as preferred stocks and convertibles .
Evaluating Dividends
Capital Group , the parent company of American Funds , has a large global team of sector analysts who focus on particular industries and funnel investment ideas to the Capital Income Builder Fund ’ s equity and fixed-income portfolio managers . In early April , the fund had just over $ 100 billion in assets .
As Avzaradel describes it , on the equity side the investment process starts with the portfolio managers analyzing a company ’ s ability to pay a dividend . They apply internal models to assess various metrics such as its dividend payout , interest coverage , earnings quality and cyclicality . They also look at a company ’ s dividend payment history , which indicates how much the company and its board have supported the dividend
Bond Sector Allocation
(% of stock portfolio )
U . S . Gov ’ t & Gov ’ t Agency * 9.2 % Mortgage-Backed Obligations 5.9 % Corp . Bonds , Notes & Loans 4.5 % Asset-Backed Obligations 0.7 % Non-U . S . Gov ’ t / Agy Securities 0.1 %
* Bonds & Notes . As of 12 / 31 / 22 . Sources : Capital Group and Morningstar .
Portfolio Statistics
# Of Equity Positions 748 Average Mkt . Cap
$ 74.01 billion P / E Ratio 12.76x Std . Dev Fund / Benchmark 12.59 / 13.35 Turnover Ratio 27 Net Expense Ratio 0.36 %
As of 12 / 31 / 22 . Standard deviation ( three-year period ) vs . the Morningstar Global Allocation TR USD Index as of 3 / 31 / 23 . Fund turnover as of 10 / 31 / 22 . Sources : Capital Group and Morningstar . as part of their capital allocation priorities . And the managers look at historical dividend growth to gauge whether a company has been able to maintain its dividend increases . Finally , they factor in valuations .
“ It starts with the dividend and an understanding of why an analyst or portfolio manager is recommending the security , and then we overlay the valuation to decide whether it ’ s an attractive investment ,” Avzaradel says .
One of the fund ’ s recent top portfolio holdings , AbbVie , exemplifies that process . The biopharmaceutical company was spun out from Abbott Laboratories in 2013 and had reaped beaucoup profits from its blockbuster drug Humira , an injectable treatment for autoimmune conditions such as rheumatoid arthritis .
AbbVie scores well on metrics for companies that can pay dividends , Avzaradel says : It generates a healthy free-cash-flow yield of about 7 %, has grown its dividend every year since its spin-out from Abbott , and the payout ratio is only 50 %, so it can comfortably keep paying the dividend .
“ It ’ s a company with a great ability to pay and has shown great commitment to paying its dividend ,” Avzaradel says , adding that just a few years ago AbbVie traded at a single-digit price-to-earnings multiple of about eight times amid
Top Five Equity Holdings
Broadcom Inc . AbbVie Inc . Philip Morris International Inc . Raytheon Technologies Corp . Zurich Insurance Group AG
As of 2 / 28 / 23 . Sources : Capital Group and Morningstar .
Top Five Fixed-Income Issuers
U . S . Treasury Ginnie Mae II UMBS Fannie Mae Federal Home Loan Mortgage
As of 12 / 31 / 22 . Sources : Capital Group and Morningstar . concerns about Humira ’ s patent expiration . The drug lost its exclusivity in January , which made it fair game for generic competition .
“ Humira was 38 % of sales a few years ago , so people were concerned about what would happen next ,” Avzaradel explains . “ The stock traded down and was available at a good valuation .” The fund approved when AbbVie bought Irish pharma company Allergan . Avzaradel says her fund ’ s analysts thought Allergan ’ s pipeline in immunology and hematologic oncology therapies was very strong , and that “ once the market looked past the Humira expiration issue , people would start to value [ AbbVie ’ s ] stock differently . It now trades at 14 times [ forward ] P / E .”
In other words , with AbbVie , she says , the analysts looked at a stock in 2020 and saw what it would look like in 2025 , rather than getting hung up by the loss of Humira ’ s patent exclusivity in 2023 .
“ This was when we combined our view about this company ’ s ability to pay a strong dividend with a very attractive valuation ,” she says . “ The dividend yield today is 3.7 %, which should grow at a high single-digit rate .”
Another recent top holding in the Capital Income Builder Fund is semiconductor and infrastructure software company Broadcom , which doesn ’ t fit the profile of a typical equity holding in the fund .
“ The company is a little more cyclical than a consumer staples , healthcare or utility company that would typically be one of our top positions ,” Avzaradel offers . “ It ’ s a company with a very high dividend , and our analysts feel it ’ s less cyclical than a typical semiconductor company . The dividend yield is 3 % and growing at a double-digit rate . And the valuation isn ’ t very high , trading at 14-15 times P / E . There ’ s attractive valuation and yield and growth of income , and our analysts don ’ t view it as cyclical as the market .”
Thinking Defensively
Capital Group employs a multi-portfolio management system with its funds . Within the Capital Income Builder
PHOTOGRAPHY COURTESY OF THE CAPITAL GROUP MAY 2023 | FINANCIAL ADVISOR MAGAZINE | 53