Finding Yield in Equities

In Search of Yield
Finding Equity Income in a Low-Yield World
iShares Market Perspectives | September 2012

iSHARES MARKET PERSPECTIVES [2]

The combined effect of a synchronized global
Executive Summary
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.

Russ Koesterich, In particular, we see reasonably valued markets with attractive yields—above 3%—in
Managing Director,
iShares Chief
developed Asia, Northern Europe and select emerging markets. In addition, at the sector
Investment Strategist 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.


Dividend Yields: Better Than the Alternative As has been pointed out by many commentators, one silver lining is
that while income is increasingly scarce in fixed income instru-
The absence of alternatives clears the mind marvelously. ments, it is more readily available in equities. Dividend yields still
—Henry Kissinger remain low compared to the bear- market bottoms witnessed in the
1970s and 1980s, but by the standards of the past 20 years equity
Most income-oriented investors in developed countries face a yields are, for the most part, at the upper end of their recent range.
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 Even in the United States, where dividend yields remain relatively
generate a reasonable yield with little or no risk. For example, since low, yields have crept above their 20-year average.The S&P 500
1982 the average yield on 90-day Treasury bills has been 4.70%.1 Index (S&P 500) is yielding approximately 2.1%, slightly better than
In other words, investors could earn roughly 5% on what was the 20-year average of 1.95%.
effectively a risk-free investment. Nor is this average simply an
artifact of the early 1980s, when yields were well into double digits. Outside the United States, the picture looks more enticing. Starting
As recently as the summer of 2007, it was still possible to earn with developed markets, the dividend yield on the MSCI World
5.25% and get a good night’s sleep.2 Index is 2.9%, roughly 1.5 standard deviations above the 20-year
average.4 Investors willing to invest in emerging markets may do
Today, investors would need to accept a substantial amount better still. The yield on the MSCI Emerging Markets Index at 3.2%
of both interest rate and credit risk to achieve a yield even is also comfortably above its 20-year average.5
approaching 5%. Yields on short-term Treasuries have been below
1% since the fall of 2009, and even an investor willing to take the Yields of 2% or 3% don’t normally set investors’ hearts aflutter, but
questionable step of lending to the United States for the next 30 it is important to put these yields in the context of the current
years would only receive a 2.50% coupon.3 environment. While many investors can still remember a 4% yield
in the United States, the last time that was available the world
Unfortunately, this situation is unlikely to change in the near term. looked quite different. Although the S&P 500 yielded 4% in the fall
In addition to the Federal Reserve Board’s (the Fed’s) guarantee of of 1990, equities had to compete with Treasury bills that were still
“low for long,” the peculiar nature of the recovery—hampered by yielding more than 7% and corporate bonds yielding well above
the ongoing global deleveraging—suggests that growth is unlikely 10%.6
to pick up substantially in 2013. This means that investors may be
facing a low-yield environment for many years to come. 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
Figure 1: MSCI World and EM Dividend Yield sovereign debt, equity yields still look attractive when compared
(1995 to Present) against a less manipulated benchmark—investment grade
5% corporate bonds.
12m Dividend Yield

4% Figure 2 compares the yield on the MSCI World Index with the yield
on the Moody’s Baa Bond Index. Currently, investors can replicate
3%

Figure 2: Equity vs. Bond Yields
2%
(1995 to Present)
0.7
1%
0.6
1/95 1/98 1/01 1/05 1/08 1/11
Yield MSCI World/YTM
Moody’s Baa Index

0.5
MSCI World MSCI EM
0.4

Source: Bloomberg, as of 6/30/12. Index yields are for illustrative purposes. Indexes 0.3
are unmanaged and one cannot invest directly in an index. Past performance does not
guarantee future results. 0.2

0.1
1
Source: Bloomberg 6/30/12.
0.0
2
1/95 1/98 1/01 1/05 1/08 1/11
3
4
Standard deviation is a measure of how widely values are dispersed from
the average value (the mean). Source: Bloomberg, as of 6/30/12. Index yields are for illustrative purposes. Indexes
5
Source: Bloomberg 6/30/12. are unmanaged and one cannot invest directly in an index. Past performance does not
6
Source: Bloomberg 6/30/12. guarantee future results.


nearly 60% of the yield on the Baa Bond Index by investing in the long-term average of 22%. Nor is this simply a US phenomenon:
MSCI World benchmark, close to the record witnessed last fall. By companies in most developed countries continue to enjoy
way of comparison, the long-term average is around 30%. Even in near-record profitability. The ROE for firms in the MSCI World
early 2011, investors could only replace roughly one-third of the Index at 22% is also close to a record high. Even in emerging
income of the Baa Bond Index with a broad equity index. At least on markets, profitability remains well above the average at roughly
a global basis, equity yields look competitive when compared to 20% (see Figure 3).
the income available in the bond market.
Overpaying for Income?
While the United States looks less interesting than the rest of the
world from a yield perspective, even in the United States yields While we see a good opportunity in dividend-paying equities,
appear more generous on a relative basis. Repeating the same we’d be reluctant to pursue that opportunity at any price. As this
exercise using the S&P 500, we find the average ratio between trade has been advocated for some time, many investors are
the yield on the S&P 500 and the yield-to-maturity (YTM) on the reasonably concerned that this theme has become too crowded.
MOODY’S Baa Index is 29%. Today it is nearly 42%. While the For some sectors, this is probably true.
absolute level of yields in the United States is close to its 20-year
average, even this relatively paltry level looks more interesting To the extent that some parts of the dividend trade have gotten
when compared to the alternatives.7 crowded, this is not just a function of the search for yield, as
many investors have been stretching for yield for a different,
Can Yields Hold? although somewhat related, reason: dividend stocks tend to have
low betas, i.e., are less volatile than the broader market.
Dividend yield, like value, can be an incomplete metric. Yields
will mechanically rise when stock prices fall, much as they did The turmoil of the last several years has left many investors with
in 2008. While this creates the temporary illusion of value, it a diminished appetite for risk. To the extent investors have not
assumes that the dividend can be maintained. This proved untrue, entirely fled the equity markets, there is a marked preference for
especially for financial stocks, during the 2008 crisis. Banks were stocks that are perceived as “safe.” Utility companies, and other
forced to cut dividends to replenish their capital base. 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
Today, the environment may be bleak and the outlook little concerned.
better, but one bright spot is the corporate sector. Despite the
overall economic malaise, investors have a reason to feel more Utilities are probably the best example of a dividend sector
secure in the sustainability of dividend streams. While equity where investors are paying too high of a premium for yield. As a
markets have been struggling since the spring, today’s yield is result, this is one part of the dividend space we would avoid.
not a function of a bear market, as it was in late 2008, but of
steadily improving corporate earnings. US utilities are currently trading at nearly 15x earnings, com-
pared to an average since 1995 of around 14.5x. The stocks are
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 Figure 3: Return on Equity
is being driven by a ruthless attention to costs—coupled with (1995 to Present)
the tailwind of cheap money and anemic wage gains—rather 26%
Return on Common Equity

than by stellar top-line growth. Nevertheless, for investors
primarily concerned about the consistency of their income 22%

stream, there is some comfort in the fact that companies have
remained profitable in the midst of the worst economic recovery 18%

in generations.
14%

Companies in the United States continue to be among the
world’s most profitable. The return on equity (ROE) for compa- 10%
1/95 1/98 1/01 1/05 1/08 1/11
nies in the S&P 500 averages 27%, significantly above the
MSCI World ROE MSCI EM ROE

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


even more expensive when you compare their valuation to the factor favoring utility stocks is the thirst for yield. In an environ-
broader market. Typically, utilities trade at a discount to the ment in which the 10-year Treasury is barely paying 1.50%, the
broader market as this is a regulated, slow growing industry. 3.50% yield on US utilities looks enticing. 12 In short, in the quest
Since 1995, utilities have traded at an average discount of for both yield and safety, utilities were a natural beneficiary.
roughly 25% to the S&P 500. However, today utilities are trading However, given high relative valuations and mediocre profitabil-
at more than an 8% premium, the largest since late 2007. 8 ity, we believe there may be better alternatives for investors
willing to cast a wider net.
One argument supporting that premium would be if the sector
had undergone a secular improvement in profitability. Given the Where Do We Find Yield? Look Abroad
regulated nature of the utilities industry, this would be a difficult
trick. In fact, today the US utilities industry is actually marginally Rather than focus on a particular sector, our general preference is
less profitable than its long-term average. ROE for US large to access high-dividend companies through broad, diversified
capitalization (large cap) utility companies is currently 10.5%, country funds. This approach helps to mitigate the idiosyncratic
the lowest level since 2004, compared to an average of 13.25%.9 dangers associated with one sector or industry. For example, in the
United States we’d favor a multi-sector fund with a smaller
When you adjust valuations for profitability, US utilities look even allocation to utility companies, such as the iShares High Dividend
more overvalued. Historically, you can explain roughly 25% of the Equity Fund (HDV).
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 Interestingly, some of the best yield opportunities are actually
typically increases by 1.4%. Today, with ROE at around 10%, you outside of the United States. This is at least partly a function of the
would expect the utilities sector to trade at around a 27% fact that the United States generally trades at a premium to most
discount to the S&P 500, rather than an 8% premium. 10 other countries. Currently, the S&P 500 trades at approximately 2x
book value. In contrast, a global benchmark—the MSCI ACWI
So why are investors paying a near 10% premium to invest in a Index—trades at roughly 1.6x book. 13
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
Figure 5: Dividend Yield by Country
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 Czech Republic
Finland
Spain
every percentage point the S&P 500 moves, utility stocks only Norway
Poland
move about half that amount, a desirable characteristic when New Zealand
Australia
investors are worried about downside protection. The second Taiwan
Italy
Brazil
Morocco
France
Singapore
United Kingdom
Sweden
Figure 4: US Utilities Relative Valuation Germany
Colombia
(1995 to Present) South Africa
Russia
Hungary
1.2 Malaysia
P/E US Utilities vs. P/E S&P 500

China
1.1 Hong Kong
Netherlands
1.0 Israel
Peru
Thailand
0.9 Indonesia
Belgium
0.8 Canada
Austria
Egypt
0.7 Chile
Switzerland
0.6 Philippines
Japan
0.5 Turkey
United States
Denmark
0.4 Mexico
1/95 1/98 1/01 1/05 1/08 1/11 India
South Korea

0% 1% 2% 3% 4% 5% 6% 7%
Source: Bloomberg, as of 6/30/12. Utilities are represented by the S&P Utility Index.
Past performance does not guarantee future results. 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.
8
Source: Bloomberg 6/30/12 as represented by the S&P Utility Index.
9
10
Source: Bloomberg 6/30/12. Source: Bloomberg 6/30/12.
12
11
Source: Bloomberg 6/30/12. The other sectors are consumer staples, consumer Source: Bloomberg 6/30/12.
13

discretionary, energy, financials, healthcare, industrials, materials, technology,
and telecommunications.


With valuations lower, depending on risk tolerance, investors can When we compare the list of high-yielding countries to our country
potentially increase their dividend yield through a focus on non-US rankings, there is a subset of countries that have the potential to
companies. Figure 5 illustrates just how low the US dividend yield offer both yield and the prospect for capital appreciation. The
is compared to the rest of the world. At 2.1%, the United States is accompanying chart illustrates the results. We would focus our
fifth from the bottom of our ranking, ahead of Denmark, Mexico, search on those countries in the upper-right corner of the figure
India and South Korea. (see Figure 6). Again, these are the countries that are currently
offering both a high yield and are potentially undervalued.
At the other extreme, 15 countries offer a yield of 4% or greater,
including a number of developed markets. Even after eliminating Using this methodology, in the developed world the list of high
countries at the heart of the euro crisis like Spain and Italy, there yielding, liquid (not all of the countries listed are easily accessible)
are still a number of options in both Europe and Asia: Finland, and potentially undervalued countries includes Finland, Norway,
Norway, New Zealand, Australia and Singapore. In addition, several New Zealand, Hong Kong, the Netherlands, Germany and
emerging markets offer yields well in excess of 4%. Excluding some Singapore. In the emerging market universe, we would focus the
of the more speculative Eastern European names, such as the search for high yielders on Taiwan, Brazil, Russia and South Africa.
Czech Republic, investors are still left with a number of Asian and For investors looking for both yield and value, we would
Latin American options, such as Taiwan and Brazil. concentrate on this list.

Moving beyond yield, several of these countries also offer Other Opportunities For Yield
compelling value for longer-term investors. In particular, many of
the countries offering the highest yields are also potentially trading Allocating by country generally offers a broad, well-diversified way
below their fair value. In attempting to isolate the relative valuation to access markets. Granted, some of the countries—particularly in
of a country, we rely on our proprietary country model. This emerging markets—can be fairly narrow in terms of their sector
approach compares the macro fundamentals for a particular and security concentration, but in general investors are investing in
country—growth prospects, profitability, risk, etc.—to current a fairly diversified collection of securities. This becomes more of a
valuations. If a country’s valuation appears too low relative to its challenge when employing more niche assets, like sector funds,
fundamentals, we would look to overweight that country. If, on the which by nature tend to be more concentrated and less
other hand, it appears that too much good news is discounted in well-diversified.
the price relative to our economic expectations, we would look to
underweight that asset. The assumption is that the former group That said, while we generally prefer to allocate our equity exposure
will outperform over the intermediate term while countries for by country or region, for yield-oriented investors willing to accept
which valuation has outstripped macro fundamentals will more idiosyncratic risk there are a few sectors to consider. The one
generally trail the broader market. 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
Figure 6: Yield vs. Country Ranking 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
7%
Czech Republic
earnings and roughly 1.3x book value, both low compared to other
Finland sectors and to the sector’s own history. 14 In addition, energy stocks
6%
Spain
Norway
historically have been particularly resilient to rising inflation. While
Poland
Dividend Yield

Australia New Zealand
our near-term outlook suggests a very small probability of any
5%
Italy Taiwan
Brazil
Morocco
meaningful acceleration in inflation, a combination of
France
United Kingdom
Singapore
Sweden
unconventional monetary policy and excessive debt burdens
4% Colombia
Germany
South Africa
Russia makes this a longer-term risk. If investors can hedge that exposure
Hungary Malaysia China
3%
Belgium Peru
Canada
Netherlands Hong Kong
Israel cheaply, and at the same time generate a yield in excess of most, if
Thailand Austria Indonesia
Philippines Chile
Turkey Egypt not all, of the Treasury curve, we think this represents an
Switzerland
2% United States
Japan
interesting opportunity.
Denmark
Mexico India

1% South Korea

Country Rank (shaded area represents potentially undervalued countries offering high yield)
14

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


Our relatively positive view on energy is balanced by a more compared to ordinary income. Looking ahead to 2013, not only is
cautious outlook on preferred stocks and REITs, two niche plays there a lack of clarity on the tax rate for dividend income, there is
that investors have been turning to for yield. On the former, while a lack of clarity regarding the future rate for ordinary income as
we see some opportunities for longer-term investors, we remain well as for capital gains. It is also unclear whether the dividend
neutral on the asset class given the accompanying volatility. A tax rate will rise in isolation or along with a broader set of tax
broad index of preferred stock is currently yielding roughly 6%,15 in hikes. Given the uncertainty surrounding the tax code, coupled
line with what is available in a typical high yield fund. However, the with the fact that there is no historical precedent for a major
6% yield on preferreds comes with a fair amount of volatility, as unilateral hike in the dividend tax rate—in the sense that
most preferred indices are heavily weighted toward financial dividend taxes rise but other rates remain constant—it is
issues, currently the most volatile sector. As the volatility of the difficult, if not impossible, to handicap the impact of tax changes
financial sector has risen, so has the volatility of preferred indices. on the preference for dividend stocks.
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 “Common sense suggests that a
allocations, as we believe a similar income can be obtained with
less volatility in other asset classes. higher marginal rate on dividend
We also maintain a cautious stance on REITs. A broad REIT index is
income compared to capital gains
currently yielding roughly 3%, in line with energy stocks. 16 However,
while energy looks cheap, REIT valuations appear closer to fair
would hurt dividend-paying stocks,
value, if not expensive. Investors have bid up the group in a search at least in a relative sense. But by
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, how much is difficult to quantify.”
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 Our suspicion is that should the dividend tax go up as part of a
historical range. REITs appear to offer little value at current levels. broader series of tax hikes—the fiscal cliff—dividend stocks may
hold up surprisingly well, despite the higher tax rate. That is
What if Taxes Rise? because a massive tax hike is likely to push the United States
back toward a recession, which is currently not priced into
The current monetary regime and the overwhelming likelihood that financial markets. Under this scenario, a higher tax on dividends
it remains in place for the foreseeable future dictate that investors is likely to be a lesser problem compared with a potential collapse
are likely to continue to seek sources of equity income. However, in aggregate demand and corporate earnings. In the event of
that focus may be somewhat impacted by potential changes to US another recession, investors may still flock to dividend stocks,
tax policy. In the event that taxes on dividends—currently the rate particularly the low beta variety, as a safe haven, regardless of the
is 15% for “qualified dividends”17 —rise, what should investors tax rate. If, on the other hand, the dividend tax rises but marginal
expect? Unfortunately, on this score history is a poor guide due to rates remain the same, there is no historical precedent with
the unprecedented nature of the current situation. which to estimate how dividend stocks might do on a relative
basis. Common sense suggests that a higher marginal rate on
Prior to 2003, dividends were generally taxed as income at the dividend income compared to capital gains would hurt dividend-
prevailing rate, minus some modest exemptions (see Figure 7). paying stocks, at least in a relative sense. But by how much is
Since 2003, dividends have been taxed at a preferential rate 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.


Figure 7: Dividend Taxation Conclusion
The search for yield is an understandable response to a prolonged
Year Top Tax Rate Year Top Tax Rate period of unusual monetary conditions. There is simply no modern
precedent for an environment in which short-term rates are held at
1913 Exempt 1962 $50 Exempt zero for a prolonged period of time. In addition, the Fed’s dedication
1914 Exempt 1963 $50 Exempt to its asset purchase programs, which have also pushed long-term
1915 Exempt 1964 $100 Exempt rates to record lows, further complicates the situation.
1916 Exempt 1965 $100 Exempt
1917 Exempt 1966 $100 Exempt 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
1921 Exempt 1970 $100 Exempt investors should focus on total return, rather than exclusively on
1922 Exempt 1971 $100 Exempt income. However, the reality is that many investors will
1923 Exempt 1972 $100 Exempt understandably look for alternative sources of income to replace
1924 Exempt 1973 $100 Exempt the more traditional sources—cash and bonds—that now provide
1925 Exempt 1974 $100 Exempt little or no yield.
In this environment, we do believe that investors should consider
equities to supplement their income needs. However, the danger is
1930 Exempt 1979 $100 Exempt in overpaying for an income stream. We see evidence of this in a
1931 Exempt 1980 $100 Exempt number of places such as utilities and, to a lesser extent, REITs.
1932 Exempt 1981 $200 -$400 Exempt (1) On the other hand, there are pockets of value that offer attractive
1933 Exempt 1982 $200 -$400 Exempt (1) yields and the potential for capital appreciation. In particular, we
1934 Exempt 1983 (1) would advocate looking at equities in Northern Europe, developed
1935 Exempt 1984 (1)
Asia, select emerging markets (Brazil, Taiwan and South Africa), as
1936 Fully Taxable 1985 Fully Taxable (1)
well as energy stocks.
1937 Fully Taxable 1986 Fully Taxable (1)
1938 Fully Taxable 1987 Fully Taxable
1939 Fully Taxable 1988 Fully Taxable While we favor a dividend tilt, both as a carry play and because
1940 Exempt 1989 Fully Taxable dividend stocks generally tend to be less volatile than the broader
1941 Exempt 1990 Fully Taxable market, we are cognizant this strategy may be hurt should tax
1942 Exempt 1991 Fully Taxable rates rise in 2013. However, unless the dividend tax rate rises
1943 Exempt 1992 Fully Taxable unilaterally, the risks may be overstated. While politicians are likely
1944 Exempt 1993 Fully Taxable
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
1947 Exempt 1996 Fully Taxable stumble and all the Bush era tax cuts expire, the tax rate on
1948 Exempt 1997 Fully Taxable dividends is likely to be a small part of the problem. Under this
1949 Exempt 1998 Fully Taxable scenario, massive fiscal drag may push the United States and large
1950 Exempt 1999 Fully Taxable parts of the global economy back into recession. Should this occur,
1951 Exempt 2000 Fully Taxable a higher tax rate may be an acceptable price for the income and
1952 Exempt 2001 Fully Taxable safety of a dividend tilt.
1954 $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%

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

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In Latin America, for Institutional and Professional Investors Only (Not for public Distribution): BlackRock does not provide tax advice. Please note that (i) any discussion of U.S. tax matters
contained in this communication cannot be used by you for the purpose of avoiding tax penalties;
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their respective owners. iS-7750-0812 3918-05RB-8/12
iS-7750-0812

In Hong Kong, this document is issued by BlackRock (Hong Kong) Limited and has not been
reviewed by the Securities and Futures Commission of Hong Kong. In Singapore, this is issued by
BlackRock (Singapore) Limited (Co. registration no. 200010143N). Not FDIC Insured • No Bank Guarantee • May Lose Value

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