in search of yield market perspectives september 2012

In Search of YieldFinding Equity Income in a Low-Yield World

iShares Market Perspectives | September 2012

i S H A R E S M A R K E T P E R S P E C T I V E S [ 2 ]

Russ Koesterich, Managing Director, iShares Chief Investment Strategist

The combined effect of a synchronized global

deleveraging and deteriorating demographics suggests

that much of the developed world is likely to be stuck in

a slow growth mode well beyond 2012. Consequently,

with demand for capital low and central banks

determined to maintain real rates at or below zero,

investors are likely to remain yield-starved for the

foreseeable future.

Among the many implications of a low-yield regime, one of the most significant is that investors will need to continue to look beyond fixed income instruments in their search for income. Fortunately, dividend yields on equities are relatively high, at least compared to the standards of the past two decades. More importantly, relative to fixed income alternatives, dividend yields are actually close to a record high.

That said, after four years of struggling in a zero-rate world there are segments of the equity income market that appear stretched and should probably be avoided. In particu-lar, some of the more defensive sectors—notably US utilities—look expensive given investor preference for yield as well as safety. However, outside of these areas we continue to see good opportunities for income-hungry investors.

In particular, we see reasonably valued markets with attractive yields—above 3%—in developed Asia, Northern Europe and select emerging markets. In addition, at the sector level we find energy stocks attractive as they not only offer a reasonable yield, but are also cheap and offer a natural hedge should inflation start to rise.

Meanwhile, investors searching for income are reasonably worried whether a yield-oriented strategy is the right approach should the tax rate on dividends rise post-2012. On this, history offers little guide. Prior to 2003, dividends were generally taxed the same as ordinary income, so there are few historical precedents on what happens following a unilateral rise in the dividend tax rate. While obviously a risk, we don’t believe this possibility changes the basic argument for a dividend tilt. As of today, the most likely scenario remains a temporary postponement of the fiscal cliff, with the second most likely outcome being a complete failure from Washington and a broad tax increase. Under this latter scenario, the general economic drag will be so large as to render the dividend tax issue less relevant: instead of worrying about the tax rate on dividends, investors will need to contend with the prospect of another recession.

Executive Summary


Dividend Yields: Better Than the AlternativeThe absence of alternatives clears the mind marvelously.

—Henry Kissinger

Most income-oriented investors in developed countries face a stark choice: take on more risk or accept lower income. This was not always the case. Up until five years ago, it was still possible to generate a reasonable yield with little or no risk. For example, since 1982 the average yield on 90-day Treasury bills has been 4.70%.1 In other words, investors could earn roughly 5% on what was effectively a risk-free investment. Nor is this average simply an artifact of the early 1980s, when yields were well into double digits. As recently as the summer of 2007, it was still possible to earn 5.25% and get a good night’s sleep.2

Today, investors would need to accept a substantial amount of both interest rate and credit risk to achieve a yield even approaching 5%. Yields on short-term Treasuries have been below 1% since the fall of 2009, and even an investor willing to take the questionable step of lending to the United States for the next 30 years would only receive a 2.50% coupon.3

Unfortunately, this situation is unlikely to change in the near term. In addition to the Federal Reserve Board’s (the Fed’s) guarantee of “low for long,” the peculiar nature of the recovery—hampered by the ongoing global deleveraging—suggests that growth is unlikely to pick up substantially in 2013. This means that investors may be facing a low-yield environment for many years to come.

As has been pointed out by many commentators, one silver lining is that while income is increasingly scarce in fixed income instru-ments, it is more readily available in equities. Dividend yields still remain low compared to the bear- market bottoms witnessed in the 1970s and 1980s, but by the standards of the past 20 years equity yields are, for the most part, at the upper end of their recent range.

Even in the United States, where dividend yields remain relatively low, yields have crept above their 20-year average.The S&P 500 Index (S&P 500) is yielding approximately 2.1%, slightly better than the 20-year average of 1.95%.

Outside the United States, the picture looks more enticing. Starting with developed markets, the dividend yield on the MSCI World Index is 2.9%, roughly 1.5 standard deviations above the 20-year average.4 Investors willing to invest in emerging markets may do better still. The yield on the MSCI Emerging Markets Index at 3.2% is also comfortably above its 20-year average.5

Yields of 2% or 3% don’t normally set investors’ hearts aflutter, but it is important to put these yields in the context of the current environment. While many investors can still remember a 4% yield in the United States, the last time that was available the world looked quite different. Although the S&P 500 yielded 4% in the fall of 1990, equities had to compete with Treasury bills that were still yielding more than 7% and corporate bonds yielding well above 10%.6

Today, equities compare much more favorably with their fixed income competitors, and even more favorably with cash. Leaving aside the rock-bottom yield available in developed market sovereign debt, equity yields still look attractive when compared against a less manipulated benchmark—investment grade corporate bonds.

Figure 2 compares the yield on the MSCI World Index with the yield on the Moody’s Baa Bond Index. Currently, investors can replicate

1 Source: Bloomberg 6/30/12.2 Source: Bloomberg 6/30/12.3 Source: Bloomberg 6/30/12.4 Standard deviation is a measure of how widely values are dispersed from the average value (the mean).5 Source: Bloomberg 6/30/12.6 Source: Bloomberg 6/30/12.

1/95 1/98 1/01 1/05 1/08 1/11

12m

Div

iden

d Yi

eld

MSCI World MSCI EM

1%

2%

3%

4%

5%

Figure 1: MSCI World and EM Dividend Yield (1995 to Present)

Source: Bloomberg, as of 6/30/12. Index yields are for illustrative purposes. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Yiel

d M

SCI W

orld

/YTM

M

oody

’s B

aa In

dex

1/95 1/98 1/01 1/05 1/08 1/110.0

0.1

0.2

0.3

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0.5

0.6

0.7

Figure 2: Equity vs. Bond Yields (1995 to Present)

Source: Bloomberg, as of 6/30/12. Index yields are for illustrative purposes. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.


nearly 60% of the yield on the Baa Bond Index by investing in the MSCI World benchmark, close to the record witnessed last fall. By way of comparison, the long-term average is around 30%. Even in early 2011, investors could only replace roughly one-third of the income of the Baa Bond Index with a broad equity index. At least on a global basis, equity yields look competitive when compared to the income available in the bond market.

While the United States looks less interesting than the rest of the world from a yield perspective, even in the United States yields appear more generous on a relative basis. Repeating the same exercise using the S&P 500, we find the average ratio between the yield on the S&P 500 and the yield-to-maturity (YTM) on the MOODY’S Baa Index is 29%. Today it is nearly 42%. While the absolute level of yields in the United States is close to its 20-year average, even this relatively paltry level looks more interesting when compared to the alternatives.7

Can Yields Hold?

Dividend yield, like value, can be an incomplete metric. Yields will mechanically rise when stock prices fall, much as they did in 2008. While this creates the temporary illusion of value, it assumes that the dividend can be maintained. This proved untrue, especially for financial stocks, during the 2008 crisis. Banks were forced to cut dividends to replenish their capital base.

Today, the environment may be bleak and the outlook little better, but one bright spot is the corporate sector. Despite the overall economic malaise, investors have a reason to feel more secure in the sustainability of dividend streams. While equity markets have been struggling since the spring, today’s yield is not a function of a bear market, as it was in late 2008, but of steadily improving corporate earnings.

As we’ve discussed previously (see “Stand or Fall: Record Profits. How Much Longer?” April Market Perspectives), given all of the troubles in the world investors continue to be pleasantly surprised by the resilience of corporate profits. Granted, growth is being driven by a ruthless attention to costs—coupled with the tailwind of cheap money and anemic wage gains—rather than by stellar top-line growth. Nevertheless, for investors primarily concerned about the consistency of their income stream, there is some comfort in the fact that companies have remained profitable in the midst of the worst economic recovery in generations.

Companies in the United States continue to be among the world’s most profitable. The return on equity (ROE) for compa-nies in the S&P 500 averages 27%, significantly above the

long-term average of 22%. Nor is this simply a US phenomenon: companies in most developed countries continue to enjoy near-record profitability. The ROE for firms in the MSCI World Index at 22% is also close to a record high. Even in emerging markets, profitability remains well above the average at roughly 20% (see Figure 3).

Overpaying for Income?

While we see a good opportunity in dividend-paying equities, we’d be reluctant to pursue that opportunity at any price. As this trade has been advocated for some time, many investors are reasonably concerned that this theme has become too crowded. For some sectors, this is probably true.

To the extent that some parts of the dividend trade have gotten crowded, this is not just a function of the search for yield, as many investors have been stretching for yield for a different, although somewhat related, reason: dividend stocks tend to have low betas, i.e., are less volatile than the broader market.

The turmoil of the last several years has left many investors with a diminished appetite for risk. To the extent investors have not entirely fled the equity markets, there is a marked preference for stocks that are perceived as “safe.” Utility companies, and other low-beta sectors, have been the prime beneficiaries of this trend. It is this part of the dividend space where we would be the most concerned.

Utilities are probably the best example of a dividend sector where investors are paying too high of a premium for yield. As a result, this is one part of the dividend space we would avoid.

US utilities are currently trading at nearly 15x earnings, com-pared to an average since 1995 of around 14.5x. The stocks are

1/95 1/98 1/01 1/05 1/08 1/11

Ret

urn

on C

omm

on E

quit

y

MSCI World ROE MSCI EM ROE

10%

14%

18%

22%

26%

Figure 3: Return on Equity (1995 to Present)

Source: Bloomberg, as of 6/30/12. Past performance does not guarantee future results.7 Source: Bloomberg 6/30/12.


even more expensive when you compare their valuation to the broader market. Typically, utilities trade at a discount to the broader market as this is a regulated, slow growing industry. Since 1995, utilities have traded at an average discount of roughly 25% to the S&P 500. However, today utilities are trading at more than an 8% premium, the largest since late 2007. 8

One argument supporting that premium would be if the sector had undergone a secular improvement in profitability. Given the regulated nature of the utilities industry, this would be a difficult trick. In fact, today the US utilities industry is actually marginally less profitable than its long-term average. ROE for US large capitalization (large cap) utility companies is currently 10.5%, the lowest level since 2004, compared to an average of 13.25%.9

When you adjust valuations for profitability, US utilities look even more overvalued. Historically, you can explain roughly 25% of the variation in the US utilities sector’s relative value by adjusting for the ROE. For every 1% increase in ROE, the multiple of the sector typically increases by 1.4%. Today, with ROE at around 10%, you would expect the utilities sector to trade at around a 27% discount to the S&P 500, rather than an 8% premium. 10

So why are investors paying a near 10% premium to invest in a sector whose profitability is close to an eight-year low? The answer is that utilities have benefited from two big trends— a flight to safety and a flight to yield. Utilities typically benefit when risk aversion is high, as the sector has had the lowest beta, only 0.5, of any of the 10 economic sectors.11 In other words, for every percentage point the S&P 500 moves, utility stocks only move about half that amount, a desirable characteristic when investors are worried about downside protection. The second

factor favoring utility stocks is the thirst for yield. In an environ-ment in which the 10-year Treasury is barely paying 1.50%, the 3.50% yield on US utilities looks enticing. 12 In short, in the quest for both yield and safety, utilities were a natural beneficiary. However, given high relative valuations and mediocre profitabil-ity, we believe there may be better alternatives for investors willing to cast a wider net.

Where Do We Find Yield? Look Abroad

Rather than focus on a particular sector, our general preference is to access high-dividend companies through broad, diversified country funds. This approach helps to mitigate the idiosyncratic dangers associated with one sector or industry. For example, in the United States we’d favor a multi-sector fund with a smaller allocation to utility companies, such as the iShares High Dividend Equity Fund (HDV).

Interestingly, some of the best yield opportunities are actually outside of the United States. This is at least partly a function of the fact that the United States generally trades at a premium to most other countries. Currently, the S&P 500 trades at approximately 2x book value. In contrast, a global benchmark—the MSCI ACWI Index—trades at roughly 1.6x book. 13

8 Source: Bloomberg 6/30/12 as represented by the S&P Utility Index.9 Source: Bloomberg 6/30/12.10 Source: Bloomberg 6/30/12.11 Source: Bloomberg 6/30/12. The other sectors are consumer staples, consumer discretionary, energy, financials, healthcare, industrials, materials, technology, and telecommunications.

12 Source: Bloomberg 6/30/12.13 Source: Bloomberg 6/30/12.

P/E

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Uti

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. P/E

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0

1/95 1/98 1/01 1/05 1/08 1/110.4

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0.6

0.7

0.8

0.9

1.0

1.1

1.2

Figure 4: US Utilities Relative Valuation (1995 to Present)

Source: Bloomberg, as of 6/30/12. Utilities are represented by the S&P Utility Index. Past performance does not guarantee future results.

Czech RepublicFinlandSpainNorwayPolandNew ZealandAustraliaTaiwanItalyBrazilMoroccoFranceSingaporeUnited KingdomSwedenGermanyColombiaSouth AfricaRussiaHungaryMalaysiaChinaHong KongNetherlandsIsraelPeruThailandIndonesiaBelgiumCanadaAustriaEgyptChileSwitzerlandPhilippinesJapanTurkeyUnited StatesDenmarkMexicoIndiaSouth Korea

0% 1% 2% 3% 4% 5% 6% 7%

Figure 5: Dividend Yield by Country

Source: Bloomberg, as of 6/30/12. Country yields represented by MSCI country index yields. Index yields are for illustrative purposes. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.


With valuations lower, depending on risk tolerance, investors can potentially increase their dividend yield through a focus on non-US companies. Figure 5 illustrates just how low the US dividend yield is compared to the rest of the world. At 2.1%, the United States is fifth from the bottom of our ranking, ahead of Denmark, Mexico, India and South Korea.

At the other extreme, 15 countries offer a yield of 4% or greater, including a number of developed markets. Even after eliminating countries at the heart of the euro crisis like Spain and Italy, there are still a number of options in both Europe and Asia: Finland, Norway, New Zealand, Australia and Singapore. In addition, several emerging markets offer yields well in excess of 4%. Excluding some of the more speculative Eastern European names, such as the Czech Republic, investors are still left with a number of Asian and Latin American options, such as Taiwan and Brazil.

Moving beyond yield, several of these countries also offer compelling value for longer-term investors. In particular, many of the countries offering the highest yields are also potentially trading below their fair value. In attempting to isolate the relative valuation of a country, we rely on our proprietary country model. This approach compares the macro fundamentals for a particular country—growth prospects, profitability, risk, etc.—to current valuations. If a country’s valuation appears too low relative to its fundamentals, we would look to overweight that country. If, on the other hand, it appears that too much good news is discounted in the price relative to our economic expectations, we would look to underweight that asset. The assumption is that the former group will outperform over the intermediate term while countries for which valuation has outstripped macro fundamentals will generally trail the broader market.

When we compare the list of high-yielding countries to our country rankings, there is a subset of countries that have the potential to offer both yield and the prospect for capital appreciation. The accompanying chart illustrates the results. We would focus our search on those countries in the upper-right corner of the figure (see Figure 6). Again, these are the countries that are currently offering both a high yield and are potentially undervalued.

Using this methodology, in the developed world the list of high yielding, liquid (not all of the countries listed are easily accessible) and potentially undervalued countries includes Finland, Norway, New Zealand, Hong Kong, the Netherlands, Germany and Singapore. In the emerging market universe, we would focus the search for high yielders on Taiwan, Brazil, Russia and South Africa. For investors looking for both yield and value, we would concentrate on this list.

Other Opportunities For Yield

Allocating by country generally offers a broad, well-diversified way to access markets. Granted, some of the countries—particularly in emerging markets—can be fairly narrow in terms of their sector and security concentration, but in general investors are investing in a fairly diversified collection of securities. This becomes more of a challenge when employing more niche assets, like sector funds, which by nature tend to be more concentrated and less well-diversified.

That said, while we generally prefer to allocate our equity exposure by country or region, for yield-oriented investors willing to accept more idiosyncratic risk there are a few sectors to consider. The one sector we would emphasize is global energy. It is worth reiterating the case for each asset.

The case for a modest alocation to global energy is based on valuation and natural inflation hedge. Energy stocks have trailed year-to-date, and as a result valuations are now very compelling. On a global basis, energy stocks are trading for less than 9x earnings and roughly 1.3x book value, both low compared to other sectors and to the sector’s own history. 14 In addition, energy stocks historically have been particularly resilient to rising inflation. While our near-term outlook suggests a very small probability of any meaningful acceleration in inflation, a combination of unconventional monetary policy and excessive debt burdens makes this a longer-term risk. If investors can hedge that exposure cheaply, and at the same time generate a yield in excess of most, if not all, of the Treasury curve, we think this represents an interesting opportunity.

Div

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d Yi

eld

Country Rank (shaded area represents potentially undervalued countries offering high yield)

1%

2%

3%

4%

5%

6%

7%Czech Republic

Finland

Norway Poland

New Zealand

MoroccoBrazilTaiwan

China

Russia

Hong Kong

Colombia

Denmark

IsraelIndonesia

NetherlandsSouth Africa

EgyptJapan

Turkey

Austria

South Korea

India

Spain

Italy

Australia

United KingdomFrance Singapore

Germany

Sweden

Mexico

United States

PhilippinesSwitzerland

Chile

Belgium

Thailand

PeruCanada

MalaysiaHungary

Figure 6: Yield vs. Country Ranking

Source: iShares Model Portfolio Solutions group 7/15/12.

14 Source: Bloomberg 6/30/12.


Our relatively positive view on energy is balanced by a more cautious outlook on preferred stocks and REITs, two niche plays that investors have been turning to for yield. On the former, while we see some opportunities for longer-term investors, we remain neutral on the asset class given the accompanying volatility. A broad index of preferred stock is currently yielding roughly 6%,15 in line with what is available in a typical high yield fund. However, the 6% yield on preferreds comes with a fair amount of volatility, as most preferred indices are heavily weighted toward financial issues, currently the most volatile sector. As the volatility of the financial sector has risen, so has the volatility of preferred indices. Therefore, preferred stocks provide a yield similar to high yield, but they do so with more volatility (in addition to being lower in the capital structure). For that reason, we have not generally liked large allocations, as we believe a similar income can be obtained with less volatility in other asset classes.

We also maintain a cautious stance on REITs. A broad REIT index is currently yielding roughly 3%, in line with energy stocks. 16 However, while energy looks cheap, REIT valuations appear closer to fair value, if not expensive. Investors have bid up the group in a search for yield, putting REIT valuations close to a four-year high. The S&P 500 large cap REIT index is trading for approximately 3x book value, representing a near 40% premium to the broader market and a 200% premium to other financial companies. On both a relative and absolute basis, valuation appears at the extreme of its historical range. REITs appear to offer little value at current levels.

What if Taxes Rise?

The current monetary regime and the overwhelming likelihood that it remains in place for the foreseeable future dictate that investors are likely to continue to seek sources of equity income. However, that focus may be somewhat impacted by potential changes to US tax policy. In the event that taxes on dividends—currently the rate is 15% for “qualified dividends”17 —rise, what should investors expect? Unfortunately, on this score history is a poor guide due to the unprecedented nature of the current situation.

Prior to 2003, dividends were generally taxed as income at the prevailing rate, minus some modest exemptions (see Figure 7). Since 2003, dividends have been taxed at a preferential rate

compared to ordinary income. Looking ahead to 2013, not only is there a lack of clarity on the tax rate for dividend income, there is a lack of clarity regarding the future rate for ordinary income as well as for capital gains. It is also unclear whether the dividend tax rate will rise in isolation or along with a broader set of tax hikes. Given the uncertainty surrounding the tax code, coupled with the fact that there is no historical precedent for a major unilateral hike in the dividend tax rate—in the sense that dividend taxes rise but other rates remain constant—it is difficult, if not impossible, to handicap the impact of tax changes on the preference for dividend stocks.

Our suspicion is that should the dividend tax go up as part of a broader series of tax hikes—the fiscal cliff—dividend stocks may hold up surprisingly well, despite the higher tax rate. That is because a massive tax hike is likely to push the United States back toward a recession, which is currently not priced into financial markets. Under this scenario, a higher tax on dividends is likely to be a lesser problem compared with a potential collapse in aggregate demand and corporate earnings. In the event of another recession, investors may still flock to dividend stocks, particularly the low beta variety, as a safe haven, regardless of the tax rate. If, on the other hand, the dividend tax rises but marginal rates remain the same, there is no historical precedent with which to estimate how dividend stocks might do on a relative basis. Common sense suggests that a higher marginal rate on dividend income compared to capital gains would hurt dividend-paying stocks, at least in a relative sense. But by how much is difficult to quantify.

“Common sense suggests that a higher marginal rate on dividend income compared to capital gains would hurt dividend-paying stocks, at least in a relative sense. But by how much is difficult to quantify.”

15 Source: Bloomberg 6/30/12 as represented by the S&P US Preferred Stock Index.16 Source: Bloomberg 6/30/12 as represented by the S&P 500 REIT Index.17 A type of dividend that meets certain criteria that allows it to be taxed at a preferential rate.


Conclusion

The search for yield is an understandable response to a prolonged period of unusual monetary conditions. There is simply no modern precedent for an environment in which short-term rates are held at zero for a prolonged period of time. In addition, the Fed’s dedication to its asset purchase programs, which have also pushed long-term rates to record lows, further complicates the situation.

Given our expectations that growth in the developed world remains below trend, we believe that the low-rate environment is likely to last for the next several years. Financial theory would argue that investors should focus on total return, rather than exclusively on income. However, the reality is that many investors will understandably look for alternative sources of income to replace the more traditional sources—cash and bonds—that now provide little or no yield.

In this environment, we do believe that investors should consider equities to supplement their income needs. However, the danger is in overpaying for an income stream. We see evidence of this in a number of places such as utilities and, to a lesser extent, REITs. On the other hand, there are pockets of value that offer attractive yields and the potential for capital appreciation. In particular, we would advocate looking at equities in Northern Europe, developed Asia, select emerging markets (Brazil, Taiwan and South Africa), as well as energy stocks.

While we favor a dividend tilt, both as a carry play and because dividend stocks generally tend to be less volatile than the broader market, we are cognizant this strategy may be hurt should tax rates rise in 2013. However, unless the dividend tax rate rises unilaterally, the risks may be overstated. While politicians are likely to wait until the last possible minute, odds still favor a last-minute reprieve of the scheduled tax hikes. If, on the other hand, politicians stumble and all the Bush era tax cuts expire, the tax rate on dividends is likely to be a small part of the problem. Under this scenario, massive fiscal drag may push the United States and large parts of the global economy back into recession. Should this occur, a higher tax rate may be an acceptable price for the income and safety of a dividend tilt.

Year Top Tax Rate Year Top Tax Rate

1913 Exempt 1962 $50 Exempt1914 Exempt 1963 $50 Exempt1915 Exempt 1964 $100 Exempt1916 Exempt 1965 $100 Exempt1917 Exempt 1966 $100 Exempt1918 Exempt 1967 $100 Exempt1919 Exempt 1968 $100 Exempt1920 Exempt 1969 $100 Exempt1921 Exempt 1970 $100 Exempt1922 Exempt 1971 $100 Exempt1923 Exempt 1972 $100 Exempt1924 Exempt 1973 $100 Exempt1925 Exempt 1974 $100 Exempt1926 Exempt 1975 $100 Exempt1927 Exempt 1976 $100 Exempt1928 Exempt 1977 $100 Exempt1929 Exempt 1978 $100 Exempt1930 Exempt 1979 $100 Exempt1931 Exempt 1980 $100 Exempt1932 Exempt 1981 $200 -$400 Exempt (1)1933 Exempt 1982 $200 -$400 Exempt (1)1934 Exempt 1983 (1)1935 Exempt 1984 (1)1936 Fully Taxable 1985 Fully Taxable (1)1937 Fully Taxable 1986 Fully Taxable (1)1938 Fully Taxable 1987 Fully Taxable1939 Fully Taxable 1988 Fully Taxable1940 Exempt 1989 Fully Taxable1941 Exempt 1990 Fully Taxable1942 Exempt 1991 Fully Taxable1943 Exempt 1992 Fully Taxable1944 Exempt 1993 Fully Taxable1945 Exempt 1994 Fully Taxable1946 Exempt 1995 Fully Taxable1947 Exempt 1996 Fully Taxable1948 Exempt 1997 Fully Taxable1949 Exempt 1998 Fully Taxable1950 Exempt 1999 Fully Taxable1951 Exempt 2000 Fully Taxable1952 Exempt 2001 Fully Taxable1953 Exempt 2002 Fully Taxable1954 $50 Exempt 2003 15%1955 $50 Exempt 2004 15%1956 $50 Exempt 2005 15%1957 $50 Exempt 2006 15%1958 $50 Exempt 2007 15%1959 $50 Exempt 2008 15%1960 $50 Exempt 2009 15%1961 $50 Exempt 2010 15%

2011 39.60%

Figure 7: Dividend Taxation

Note (1): $750 to $1500 exepmt if reinvested in utilitiesSource: Tax Foundation (they sourced Treasury Dept. and Commerce Clearing House). Accessed on seekingalpha.com 7/19/12.

iS-7

750-

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Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal. Diversification may not protect against market risk.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Narrowly focused investments and investments in single countries may exhibit higher volatility. There is no guarantee that dividend funds will pay dividends.

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in search of yield market perspectives september 2012

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