The quest for high dividends overseas

January 20, 2011

An official of the Volksbank Bosnia branch presents a handful of newly-launched euro bank-notes in the capital Sarajevo on January 3,2002.REUTERS/Danilo KrstanovicA recent Portfolioist.com piece on the tradeoffs of investing in dividend stocks instead of bonds sparked a lively discussion about global dividend stocks. The big question for readers: “How come no one ever writes about income investing outside the U.S.?”

One reason may be that investors don’t have to go to foreign corporations for global dividends. Many U.S.-based dividend payers earn lots of their revenue overseas — Philip Morris International (PM) is legally headquartered in New York but gets 100 percent of its revenue selling Marlboros and other tobacco products outside of the 50 states. Its yield is currently 4.6 percent.

Companies in the Standard & Poor’s 500 index, on average, got just under 30 cents of every dollar of 2009 revenue overseas, according to Bespoke Investments Group. Goldman Sachs predicts the index will yield 2 percent in 2011.

But for those with more exotic tastes, there are more direct ways to buy global dividends. Plenty of foreign companies trading on American exchanges through ADRs offer good dividends. There are also exchange-traded funds (ETFs) and mutual funds focused on foreign dividend stocks.

The attraction of some of these stocks — in addition to any prime business fundamentals — is uncommonly high yields. According to Factset data, the dividend yield for the MCSI EAFE, an index of developed market firms outside the U.S. and Canada, was 2.93 percent through December 31, 2010, compared to 1.86 percent for the U.S.-focused S&P 500.

A recent list found 25 global stocks with a yield exceeding five percent. And several companies yield over six percent — France Telecom (FTE), Germany’s Electrical Utility RWE AG (RWEPY.PK) and Brazilian Utility CPFL Energie (CPL). One stock, Australian Telecom Telstra Corp. (TLSYY), yields more than 9.7 percent.

Judy Sarayan, a portfolio manager for several Eaton Vance dividend mutual funds, thinks investors are going to pay more attention to foreign dividend-paying stocks as their strengths become better known:

The yield on many European equity markets is greater than it is for 10-year U.S. Treasuries and for their respective sovereign debt yields. We anticipate increased investor demand for alternate sources of income, which bodes well for high-yielding European equities. After the financial crisis in 2008, many investors’ focus shifted from capital appreciation to capital preservation and income. As investors continue to search for income that has the potential to outpace inflation, we believe that foreign dividend paying stocks may become more popular.

For U.S. investors, Sarayan says, global dividend stocks offer a diversification of currency exposure combined with higher yields and relatively cheap stock prices. Plus, you get a shot at growth outside the U.S. and cut your exposure to U.S. risk. Any company boosting dividends, Sarayan also argues, has fiscal discipline, and the cash on hand to pay dividends, leaving “no opportunity for creative accounting or questionable financial reporting practices.”

There are some differences and possible drawbacks to foreign dividend investing, however, including: currency risk, irregular dividend payments, and differences in accounting standards or corporate financial reporting that may make it tougher for an investor to research.

Rather than paying dividends quarterly, it’s common for companies outside the U.S. to make payouts once or twice a year. That impacts the compound growth of your money if you’re a dividend re-investor, and also might not suit people using their dividends to fund current expenses.

The dividend of a foreign company isn’t always as reliable as that of a U.S. firm, either. Many overseas companies pay dividends equal to a percent of earnings, making them more volatile than in the U.S. where a record of steady or increasing dividends is prized.

Some companies do pay regularly, though. The International Dividend Achievers is a list of stocks that have increased their annual regular dividend payments for the last five or more consecutive years. There are 77 companies in the index — and it’s done pretty well, climbing 75% over the past two years compared to a 59% climb for the MSCI World ex-USA benchmark.

Foreign dividends can complicate your taxes because foreign taxes will be withheld from your dividends. You can get a credit against your U.S. taxes, though, if you hold the stocks in a taxable account.

No matter how you invest, you’ll need to do some homework. If you’re buying individual stocks, you will need to get comfortable with those businesses. But even if you’re buying an exchange-traded fund, you’d be wise to do a little peeking under the covers. Dividend ETFs are the fastest-growing group of the now-$1 billion ETF world, but some are fretting their dividend payouts may not be so stable. The answer: be sure you know what’s in any ETF you buy.

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