Viewpoints March 01 The 80-year-old fad: Dividend investing comes back into vogue The top-yielding quintile of the Standard & Poor s 500 Composite Index had the worst returns in 009 and the best returns in 011. We are often asked the question, Where do these stocks go from here? While there may be some value in trying to time an entry point into dividend-focused strategies, there is only so far one can go with that approach; we believe it is best to take a strategic, long-term approach to dividend investing. At Capital Guardian and American Funds, we believe that both dividend-growth and dividend-income strategies should be a core part of an equity allocation for reasons that are well-recognized but less-followed the dependability of the return stream and the potentially lower volatility of the equity exposure. While investors look for a myriad of ways to reduce equity beta risk, surprisingly, they often do not look to reduce that risk within the equity exposure itself. Yet, a well-diversified dividend strategy, and particularly a dividendgrowth strategy, can contribute meaningfully toward that goal. Several of Capital Guardian and American Funds dividend-focused funds have historically exhibited lower volatility than that of the broader market. Moreover, as the world economy undergoes a great global rebalancing, with developed markets in a low-growth environment while emerging markets continue to drive global growth, there is a high likelihood that dividends will become a greater part of total equity return. As fundamental investors, we seek to identify not only those companies that already pay a dividend, but those that are likely to initiate or grow one. That is because growing a dividend is not just an accounting or financing mechanism. Indeed, in our more than 80 years of experience, we have found that corporate managements who pursue consistent dividend policies tend to be more disciplined, systematic and creative in many aspects of their business. These are the companies that can provide the powerful combination of capital appreciation and a rising dividend stream. A vast body of academic literature supports what we as investors have empirically observed. When appropriate we, as a large investor in capital markets, encourage corporate managements to think more proactively about initiating or increasing dividend payouts. It is also through fundamental research that we, as active managers, seek to provide value over and above what may be captured through pure quantitative screens or black-box strategies when investing in dividend-focused mandates or funds. We have found that global dividend strategies allow us to add value and effectively pursue income objectives. A global strategy allows us to achieve significant diversification within a portfolio and provides the flexibility to construct an efficient portfolio on multiple parameters. Moreover, in our view, multi-asset strategies that allow for the combination of equities and fixed income can provide a compelling risk-reward framework, not forcing managers to take on extra risk in order to meet yield targets. Nevertheless, we understand that many institutional investors prefer to keep distinct allocations to various asset classes. For this reason, Capital Guardian and American Funds offer investors several options, including dividend-growth multi-asset and equityonly strategies, as well as funds with a greater focus on dividend income within a U.S., international or global framework. Viewpoints is a publication exclusively for institutional prospects, clients and consultants. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Past results are not predictive of results in future periods.
19.5% 8.% 8.%.4% Trying to time an entry into dividend strategies Quintile can 1 be a fool s game 18.% 50.8%.8% Top-yielding U.S. dividend stocks went from worst to first in just two years One-year total returns for S&P 500 yield quintiles Calendar year 009 S&P 500 = 6.5% 14.6% (highest dividend payers) Quintile (second highest) Quintile 3 (third highest) Quintile 4 (second lowest) Quintile 5 (lowest dividend payers) Calendar year 011 S&P 500 =.1% Quintile 1 (highest dividend payers) 15.5% 17.5% The market environment for dividend-paying companies can change rapidly. In 009, the highest yielding quintile of the S&P 500 had the worst returns, rising about 15% versus more than 50% for the bottom quintile. Just two years later, the top quintile posted the strongest returns, rising nearly 18% in 011 versus negative returns for the bottom two quintiles. Quintile (second highest) 19.5% 8.% Quintile 3 (third highest) 8.%.4% Quintile 4 (second lowest) Quintile 5 (lowest dividend payers) 18.% 50.8% 14.6%.8% Sources: Capital Strategy Research, FactSet. Companies that constituted the S&P 500 Index were ranked by dividend yield at the beginning of each period and then divided into quintiles based on market weights. Constituents were held constant throughout the periods. The dividend yield range for each quintile is as follows for 009: 4.6% or higher for Quintile 1, 3.1% 4.6% for Quintile,.1% 3.1% for Quintile 3, 1.0%.1% for Quintile 4 and 0.0% 1.0% for Quintile 5; for 011, it was: 3.1% or higher for Quintile 1,.3% 3.1% for Quintile, 1.1%.3% for Quintile 3, 0.1% 1.1% for Quintile 4 and 0.0% 0.1% for Quintile 5. The index is unmanaged and, therefore, has no expenses. The value of larger, dividend-paying companies, however, tends to be recognized later in a recovery. Every recovery is different, but by the second year of many recoveries, as the economy and the market have gathered steam, so have many larger, higher quality companies. On a sector basis, the highest dividend-yielding stocks are heavily represented by the defensive areas of the market, including consumer staples and utilities. Some stocks in these sectors have seen valuations rise. Other sectors have more reasonable valuations, including energy, health care and even technology, where more and more companies are paying dividends. Many banks are also modestly raising their dividends after slashing them in wake of the 008 financial crisis.
Dividends should make up larger part of total return as markets normalize Dividends have been a significant component of total return in most decades* 13.9 5.3 5. 196 199 5.3 1930 1939 3.0 6. 5.8 1940 1949 13.6 1950 1959 *Total return assumes reinvestment of income. Sources: Standard & Poor s, Ibbotson. 4.4 3.4 1960 1969 1.6 4.3 1970 1979 1.6 5.0 1980 1989 15.3.9 1.8. 1990 1999.7 000 009 Capital appreciation (%) Dividends (%) 6. 010 011 5.5 4.3 196 011 Historically, dividend payments have accounted for a large portion of investors total return: 44% for the S&P 500 on an average annual basis from 196 to 011. Even during decades when the index s total return was negative, dividend yields offered a positive return for investors. For example, the S&P 500 has posted an average annual total return of 1% over the past 10 years versus an average dividend yield of 1.8%. Going back even further, dividends have had a strong impact on long-term equity returns. From 180 to 00, dividends were by far the main source of real return from equities accounting for 500 of 790 basis points over the 00-year period dwarfing the other constituents, including inflation, rising valuations and real dividend growth. 1 Equity returns in developed markets could be more muted than they were in the decades of the 1980s and 1990s against the backdrop of what could be many years of modest economic growth. As such, dividends are likely to make up a greater portion of total return than they have in recent years. 1 Robert D. Arnott, Dividends and the Three Dwarfs, Financial Analysts Journal, May/June 003. 3
The power of paying and increasing a dividend is hard to deny Dividend growers and initiators have shown the best returns S&P 500 geometric total return December 31, 1981 December 31, 011 10.3% Dividend growers 7.6% Dividend payers with no change in dividend 0.1% 1.6% Dividend cutters Non-dividend paying stocks Source: Ned Davis Research. Copyright 01 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo. Companies that pay dividends have typically offered better returns than those that do not. Since 1973, these stocks have generated excess returns over those that do not pay a dividend in 4 out of 37 years, or nearly two-thirds of the time in the U.S. Among these stocks, companies that grow or initiate dividends have achieved the best results over the past 30 years, gaining 10.3% per year, versus 7.6% for payers that don t increase dividends. One of the primary reasons is that stable, growing payouts are generally a sign that a company has competitive advantages and a strong balance sheet, and shows management confidence that its earnings and cash flows will continue to support future payments. In general, companies that grow their dividends over time are believed to be more efficient allocators of capital over longer periods. Steadily growing dividends can also be seen as a form of earnings transparency they require the disciplined use of capital. Once a dividend is initiated, companies are often under pressure to maintain that payment and increase it over time. 4
Portfolio managers typically seek the high dividend growers Our managers look at the intersection of current dividend yield and expected growth rate Eligible securities* Current yield (%) 10 8 6 4 0 Target growth 5% Target yield (sliding scale) 0 1 3 4 5 6 7 8 9 10 11 1 13 14 15 Projected 3-year dividend growth (%) *Based on Absolute Income Grower as of December 31, 011 (for illustrative purposes only) Source: Capital Group International, Inc. Our portfolio managers and analysts in dividend growth strategies explore the combination of the current yield a company offers and the potential to grow that dividend over time. It is the growth potential of the dividend stream that is the most powerful signal of a company s ability to generate long-term value for shareholders. Our large, global team of analysts seeks out attractive companies from around the world that should prospectively pay and grow their dividends. Analysts provide three-year dividends-growth forecasts and update them regularly based on the company s financial health and prospects. Eligible securities must meet the expected income and income-growth profile of the mandate. The chart on the left is an illustrative example of what an eligible investment universe can look like at a point in time. The eligible investment list is the starting point of the portfolio construction process. Fundamental research is key to identifying quality companies with good managements, strong business models and the ability to grow earnings and dividends over time. 5
Paying dividends has been a better allocation of cash than share buybacks Dividend growers return outpaces accelerated stock repurchasers Total returns of S&P 500 stocks by use of excess cash (Assumes $100 invested December 31, 1979) $3,000 $,500 $,000 $1,500 $1,000 $500 Dividend growers and initiators 10.6% CAGR* ($100 goes to $,511) Repurchase growers 8.8% CAGR* ($100 goes to $1,506) S&P 500 7.7% CAGR* ($100 goes to $1,06) Research has shown that companies who use excess cash to grow their dividends rather than expand their repurchases of stock generally have offered a better reward to shareholders over time. Moreover, dividends are cash in shareholders pockets while repurchases depend on the price paid, which can quickly fall if the shares are bought near peak valuation. As the chart to the left shows, companies that initiate and grow dividends over time have had better returns than those that accelerate share repurchases, outpacing them by 180 basis points since 1980. S&P 500 companies have deployed nearly $1 trillion to repurchase shares over the past three years. Our research confirms that many corporations are not always efficient at maximizing shareholder value through share buybacks. As and when appropriate, we show this research to companies and continue to push for higher dividend payouts. $0 1979 1983 1987 1991 1995 1999 003 007 011 *Compound annual growth rate. Data as of December 31, 011. Methodology: Companies in the S&P 500 who have paid more dividends or repurchased more $ in the last 1 months than in the prior 1 months. Companies remain in their respective indexes for at least 1 months. All figures are unweighted geometric total returns. Repurchase growers are a subset of S&P 500 firms whose repurchases equal or exceed 5% of market capitalization. Sources: Capital Research Global Investors and Ned Davis Research. Copyright 01 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo. With payout ratios in the U.S. at historic lows, there is more room for managements to use their large amounts of cash to pay dividends they are typically a better allocation of capital than share buybacks, which don t usually work unless the stock is beaten down. Jim Lovelace, portfolio counselor 6
A high payout ratio is closely correlated to future earnings growth Correlation between dividend payout ratios and real earnings growth S&P 500 s payout ratio vs. next 10 years real earnings growth* Real earnings growth (%) 1 10 8 6 4 0 4 35 45 55 65 75 85 Payout ratio (%) Higher payout ratios are often indicative of strong earnings growth *Dots represent monthly observations of S&P 500 payout ratios for the years 1946 to 001 (x-axis), as well as real earnings growth over the following 10 years on a compound-annual-growth-rate basis (y-axis). The trend line illustrates this relationship between the payout ratio at the time and the subsequent 10 years of real earnings growth. Sources: Capital Research Global Investors, Arnott and Asness. Historical evidence strongly suggests that expected future earnings growth is fastest when current dividend payout ratios are high and slowest when payout ratios are low, according to a 003 study by Robert D. Arnott and Cliff S. Asness. 1 They stated, Our evidence contradicts the views of many who believe that substantial reinvestment of retained earnings will fuel faster earnings growth. Companies that can grow their dividends are generally more efficient allocators of capital over longer periods. Their management teams choose how much of their profits to pay out to shareholders and how much to reinvest in the business. Once a dividend is initiated, companies are under pressure to maintain that payment and hopefully increase it over time. Paying dividends is good discipline for management, as they have to ensure their strategies and actions reward shareholders. We continue to witness this trend in our own experience as active investment managers. Ping Zhou and William Ruland observed in another study that many market observers and investors associated high dividend payout with weak future earnings growth. However, they concluded, our tests show that high dividend payout companies tend to experience strong, not weak future earnings growth. 1 Arnott and Asness, Surprise! Higher Dividends = Higher Earnings Growth, Financial Analysts Journal, Jan./Feb. 003. Zhou and Ruland, Dividend Payout and Future Earnings Growth, Financial Analysts Journal, May/June 006. 7
Global dividends can provide diversification and higher yield The highest dividend yields are found abroad, increasingly in emerging markets 15-year average yield.6% MSCI EAFE.4% MSCI EM Stocks yielding more than 3% in the MSCI ACWI universe (by region) 1.8% S&P 500 Region* % of stocks # of stocks Largest company in index Yield (%) Europe 38 137 Nestlé 3.4 United States 35 103 Chevron 3.0 Asia Pacific 13 84 Commonwealth Bank of Australia 6.5 Emerging markets 9 6 Taiwan Semiconductor Manufacturing 4.0 Canada 5 6 Royal Bank of Canada 4. Total 6 41 *Based on MSCI ACWI data for companies with at least $5 billion market capitalization and 3% dividend yield as of December 31, 011. Sources: RIMES; Capital Group International, Inc. A global strategy can provide significant diversification within a portfolio and allows us the flexibility to construct what we believe to be the best portfolio on multiple parameters. As the chart to the left shows, companies outside of the U.S. have had a tendency to pay higher dividends over longer periods of time. In addition to developed markets in Europe and Asia, many emerging markets are offering attractive opportunities for dividend investors. As the table on the left shows, of the universe of companies that have at least a 3% dividend yield and a $5 billion market cap, 13% reside in developed Asia Pacific and another 9% in the emerging markets, which represents a rapidly growing segment of the market. Emerging markets are generally viewed as high-growth markets, albeit with higher risk. Yet even for those markets, for the decade ending December 31, 010, about 17% of the total annualized return of 16% came from dividends, according to data from MSCI. Since many European companies dividends are more closely tied to their earnings, it is important to understand a company s dividend policy as well as its earnings outlook in order to determine the sustainability of its dividend. They tend to cut dividends more quickly when the economy slows down. 8
The world is a fertile hunting ground for quality, high-yielding companies Stocks yielding more than 3% in the MSCI ACWI universe (by sector) Sector* % of stocks # of stocks Region Financials 3 14 United Consumer staples 13 36 States Energy 13 37 Health care 13 16 Telecommunication services 10 33 Industrials 8 45 Utilities 7 49 Information technology 6 19 Materials 5 3 Consumer discretionary 3 1 Total 6 41 EAFE + Canada Emerging Markets *Based on MSCI ACWI data for companies with at least $5 billion market capitalization and 3% dividend yield as of December 31, 011. Sources: RIMES, Capital Group International, Inc. Looking at the potential investment universe of dividend-paying companies by sector also highlights differences among markets and regions financials have become a much smaller part of the dividendpaying segment of companies in the U.S. but remain a large part of it in Europe. Consumer staples, health care and information technology account for a large share of dividend-paying companies in the U.S., while materials and energy companies are the biggest dividend payers in the emerging markets. Several non-u.s. companies offer attractive dividend yields in excess of 5%, with a few even over 7%, including several telecom stocks. In Asia, research has shown that dividend yields on roughly a third of equities are better than their countries respective government bond yields. However, investors must be careful of falling into a dividend trap, as some companies have attractive yields only because their share price has declined. 9
Higher dividend income is more appealing in a low-bond-yield environment Dividend yields have exceeded bond yields in many countries Major world stock markets dividend yields as of December 31, 011 6.0% 5.0 4.0 3.0.0 1.0 0. Sources: RIMES, Bloomberg. 5.1 5.1 3.7 3.5 10-year government bond yield U.S. France Australia U.K. Switzerland Canada Japan MSCI ACWI.8.7.9 While dividends provide steady income at more attractive yields than many bonds, as the chart shows, fixed income can play a role in dividend investing. In addition to the supplemental yield to help meet income targets, the downside protection provided by fixed income allows investors to take on additional risk in the equity portion of the portfolio by seeking higher dividend yields. Long-term investors have the opportunity to invest in U.S. companies that not only provide a relatively high yield well above the 10-year Treasury but also have the potential for capital appreciation. Several wellestablished, large companies offer both high yields and stable, long-term earnings potential. Equity holders of these companies can potentially benefit from a bondtype yield, in addition to possible capital appreciation. Many countries offer dividend yields higher than their corresponding government bond yields most notably France and Australia with dividend yields above 5%, versus less than half that for the U.S. In Switzerland, the equity market s dividend yield of 3.5% is nearly five times the yield on its 10-year government bond. 10
Dividends can help lower the volatility of the equity beta in your plan Dividend-paying stocks have shown less volatility than non dividend-paying stocks Plus/minus one standard deviation of rolling three-year total return 1, December 31, 199 January 31, 011 Return (%) 40 30 0 10 0 10 0 30 40 Dividend-paying stocks Non dividend-paying stocks 9 93 94 95 96 97 98 99 00 01 0 03 04 05 06 07 08 09 10 11 Total return 3 (%) 1 year 3 year 5 year 10 year 30 year Dividend growers. 14.1 1.1 4.1 10.3 > Higher return Dividend payers 0.3 15.7.9 3. 9.4 Non-payers 11.7 15.8 6.3.7 1.6 Volatility 3 (%) Dividend growers 18.3 19.1 19.7 15.8 15.9 > Lower volatility Dividend payers 19.0.8.8 18.3 16.8 Non-payers.0 4.7 6.0 5.0 4.4 1 Return data based on S&P Broad Market Index. The standard deviation of returns is used to measure the variability of prices (one standard deviation means 67% of the data set that surrounds the average return). Source: Capital Strategy Research. 3 Return data through December 31, 011, based on S&P 500; volatility is measured by standard deviation. Source: Ned Davis Research. Copyright 01 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo. Over the long term, dividend-paying stocks tend to have a lower volatility of returns than non-dividendpaying stocks. The chart on the left shows plus/ minus one standard deviation of rolling three-year total returns. The standard deviation for dividend-paying stocks has typically been between 10% and 0% less than it has for non dividend-paying stocks. Investors could have achieved equal if not superior results over the long term with lower volatility by investing in dividend-paying companies. Dividend growers have returned 10.3% over the 30-year period ending December 31, 011, with a volatility of 15.9% compared to a return of 1.6% with a volatility of 4.4% for non-payers, according to data from Ned Davis. With a history of higher returns and lower volatility, the case for companies that can grow their dividends over time appears to be very strong. The challenge for our industry is how to convince savers to participate in an equity market that is increasingly volatile. One route that appeals to me is via quality income. In other words, via sustainable and growing dividends. Philip Chitty, macroeconomic analyst 11
Dividends can help address a range of investment needs Volatility, inflation and income needs have dominated investor attention Low return environment Going global Volatility Dividends Volatility concerns Inflation Income needs Investors can use dividend-growth strategies to pursue a variety of needs. These include lowering volatility, meeting growing income needs and using dividendpaying stocks as a hedge against inflation. Investors may want to consider dedicating a portion of their global equities allocation to dividend-focused strategies, which often have a risk-return profile that is different from global unconstrained or concentrated global strategies. Given the lower volatility typically associated with dividend strategies, they can also help reduce the volatility of the overall equity exposure. Dividends have played an important role in offsetting the effect of inflation. Since 1947, total dividends across S&P 500 companies have grown by an average of 5.6% per year, while the average inflation rate in that period has been about 3.7%. Bond yields have fallen steadily over the past few years. In this environment, dividend income can help contribute to diversifying the sources of return. As populations age in the wealthier nations, investors are likely to put a greater emphasis on diversifying sources of income. 1
Capital Group s dividend-focused strategies have provided an attractive risk-return profile Dividend-focused funds historically offer high relative returns and low volatility Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Figures shown are past results for Class R-6 shares and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Fund results shown are at net asset value with all distributions reinvested. Class R shares do not pay an up-front or deferred sales charge. For current information and month-end results, visit AmericanFundsRetirement.com. 10-year period Average annual return (%) 10 8 6 4 0 CIB IFA AIG 1 AMF ICA WMIF WGI ACWI S&P 500 MSCI World 10 11 1 13 14 15 16 17 18 19 0 Standard deviation (%) Capital Guardian and American Funds dividendgrowth, growth-and-income, and equity-income funds have delivered better risk-adjusted results than their respective benchmarks over the past 10-year period. In addition to providing better results, our dividendfocused strategies have done so with less volatility than their benchmarks. With higher returns, lower volatility and downside protection, multi-asset dividend strategies that allow for the combination of equities and fixed income provide for a compelling risk-reward framework, in part because they do not force managers to take undue risk to meet yield targets. Capital Guardian and American Funds offer investors several options, including dividend-growth multi-asset and equity-only strategies, as well as mandates with a greater focus on dividend income within a U.S., international or global framework. 1 Launched by Capital Guardian on May 31, 003. Gross dividends reinvested. Source: Capital Group International, Inc. Data from December 31, 001 to December 31, 011, for funds with a history of at least 5 years. Standard deviation based on monthly returns. 13
Dividends: an 80-year fad at Capital Group Our investment affiliates have looked to companies that pay dividends as a source of income since the 1930s. 1930s 1940s 1950s 1960s 1970s 1980s 1990s 000s 010s 1934 Launched The Investment Company of America, which seeks growth of capital and income by investing in companies with potential for future dividends 1 195 Launched Washington Mutual Investors Fund 1 1973 Launched The Income Fund of America 1 Began managing fi xed-income assets for institutional clients 1987 Launched Capital Income Builder, 1 a mutual fund with a similar objective to Absolute Income Grower 1993 Introduced Capital World Growth and Income Fund, a global fund that balances income and growth 1 003 Launched Absolute Income Grower strategy for institutions 008 Introduced International Growth and Income Fund to seek investment opportunities among dividend-paying companies outside the U.S. 1 01 Launched World Dividend Growers strategy for institutions We have been investing in dividends since shortly after the organization was founded more than 80 years ago, and dividends remain a core part of our long-term investment strategy and one could even say part of our investment DNA. Dividend investing began with our first fund, The Investment Company of America, in the early 1930s. 1 The emphasis on dividends only grew over time, with the launch of Washington Mutual Investors Fund in the 1950s and Capital Income Builder in the 1980s. 1 Absolute Income Grower was launched in 003 and, like Capital Income Builder, it is a global mandate that has an explicit focus on dividend growth and the flexibility to invest in fixed income as well as equities. Most recently, we launched a new strategy this year called World Dividend Growers, which invests only in equities. As active managers, Capital Guardian and American Funds have an intensive research process that involves our analysts making thousands of company visits a year and meeting with various executives and managers to understand the history and reasoning behind each company s dividend policy. This helps our investment professionals make the most informed investment decisions they can when investing in dividend-paying companies. 1 Capital Research and Management Company. Companies within Capital Group International, Inc. or their predecessor. Capital Research and Management Company and the companies within Capital Group International, Inc., which include Capital Guardian Trust Company and Capital International, manage equity assets independently from one another. Capital Research and Management Company manages equity assets through two investment divisions. These divisions make investment decisions independently. American Funds Capital Guardian 5 1 Capital Research and Management Company. Companies within Capital Group International, Inc. or their predecessor. Capital Research and Management Company and the companies within Capital Group International, Inc., which include Capital Guardian Trust Company and Capital International, manage equity assets independently from one another. Capital Research and Management Company manages equity assets through two investment divisions. These divisions make investment decisions independently. 14
Important information Average annual total returns for periods ended December 31, 011 American Funds Class R-6 shares Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Figures shown are past results for Class R-6 shares and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Fund results shown are at net asset value with all distributions reinvested. Class R shares do not pay an up-front or deferred sales charge. For current information and month-end results, visit AmericanFundsRetirement.com. 1 year 5 years 10 years Expense ratio 30-day SEC yield American Mutual Fund (AMF) 5.08% 1.58% 4.84% 0.3%.75% Capital Income Builder (CIB) 3.15% 1.14% 7.03% 0.3% 3.86% Capital World Growth and Income Fund (WGI) 7.3% 0.6% 7.85% 0.46% 3.1% The Investment Company of America (ICA) 1.45% 0.57% 3.77% 0.30%.48% The Income Fund of America (IFA) 5.94% 1.96% 6.51% 0.31% 4.35% Washington Mutual Investors Fund SM (WMIF) 7.35% 0.38% 4.05% 0.31%.78% The expense ratio is as of the fund s prospectus available at the time of publication. When applicable, investment results reflect fee waivers and/or expense reimbursements, without which results would have been lower. Please see americanfunds.com for more information. Class R-6 shares were first offered on May 1, 009. Class R-6 share returns prior to the date of first sale are hypothetical based on Class A share returns without a sales charge, adjusted for typical estimated expenses. Please see each fund s prospectus for more information on specific expenses. If used after March 31, 01, this material must be accompanied by a current American Funds statistical update. Capital Guardian composites 1 year 5 years 10 years Absolute Income Grower SM (AIG) gross of management fees 4.17% 0.09% net of management fees 3.44% 0.61% World Dividend Growers SM (WDG) Returns are in US$. Periods greater than one year are annualized. Returns reflect the reinvestment of dividends, interest and other earnings. Composite returns are calculated using the current highest management fees and are net of withholding taxes on dividends, interest and capital gains. Actual withholding tax rates vary according to the country of denomination and tax status of each portfolio. Composite net returns are calculated using the current highest management fees. Actual investment returns net of management fees may differ depending on, among other things, the applicable fee schedule and portfolio size. The information supplements or enhances required or recommended disclosure and presentation provisions of the GIPS standards, which if not included herein, are available upon request. GIPS is a trademark owned by CFA Institute. Indices 1 year 5 years 10 years S&P 500.09% 0.5%.9% MSCI World 5.0% 1.8% 4.15% MSCI AC World 6.86% 1.41% 4.76% The indexes are unmanaged and, therefore, have no expenses. Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectus, summary prospectus or the Capital Guardian Funds Characteristics statement, which can be obtained from a financial professional, Capital Guardian or your relationship manager, and should be read carefully before investing. Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. The statements expressed herein are informed opinions, are as of the date published, and are subject to change at any time based on market or other conditions. This publication is intended merely to highlight issues and is not intended to be comprehensive or to provide advice. Permission is given for personal use only. Any reproduction, modification, distribution, transmission or republication of the content, in part or in full, is prohibited. 03/01 01 Capital Group Institutional Investment Services 15 The Capital Group Companies American Funds Capital Research and Management Capital International Capital Guardian Capital Bank and Trust 15