8/25/2011 12:46 PM ET|
Look abroad for dividend income?
International mutual funds and ETFs that focus on dividends may be just the ticket to generate income -- especially if the dollar remains weak.
Finding stocks that generate income without excessive risk is a tall order in this unforgiving market.
Accordingly, the search for yield has become a global hunt. The Standard & Poor's 500 Index ($INX) yields barely 2%, but investors can capture that, and more, via non-U.S. companies, as well as exchange-traded funds and mutual funds that hold dividend-paying foreign stocks.
Moreover, as long as the U.S. dollar stays weak, money earned from overseas sources is worth more to dollar-based investors.
Predictable, steady dividend income is coveted at times, like now, when the outlook for corporate earnings growth is cloudy. Historically, dividends have been a crucial part of a stock's total return -- and an important source of steady cash in a harrowing market, essentially paying investors while they wait for better opportunities.
"In this kind of choppy market, dividends are huge" pillars of support for a diversified portfolio, said Alec Young, international equity strategist at Standard & Poor's Equity Research.
Dividends could be an even bigger source of total return from foreign equities as stock gains moderate, Young said.
One of the best ways to generate income and spread risk is through international-stock ETFs that focus on dividends.
For example, the dividend yield for the Stoxx Europe 600 Index ($DE:SXXL), made up of companies -- large and small -- across 18 European countries, is 4.67%.
One related ETF, First Trust Stoxx European Select Dividend Index (FDD), tracks the performance of 30 high-yielding companies from the broad index that make up the Stoxx Europe Select Dividend 30 Index. The portfolio recently yielded about 5%.
Some of the larger, broad-based international ETFs include iShares Dow Jones International Select Dividend Index (IDV), SPDR S&P International Dividend (DWX) and WisdomTree Dividend ex-Financials (DOO).
ETFs offer investors access to dividend-paying international stocks without the need to do homework on each company. It's an indiscriminate way to invest, so it's a good idea to check what the ETF holds; it could be more heavily weighted in one particular country or sector than you'd like.
The iShares Dow Jones International Select Dividend Fund recently yielded 4.8% and held 103 companies. Its biggest holdings were locally traded shares of Eni, an Italian oil and natural gas provider, Commonwealth Bank of Australia and British American Tobacco.
The SPDR S&P International Dividend Fund, designed to measure the performance of the 100 highest dividend-yielding common stocks, recently yielded about 5.6%. Top holdings include locally traded shares of Swedish telecom provider Tele2 Ab, Telecomunicacoes de Sao Paulo and Australian stock exchange operator ASX.
WisdomTree Dividend ex-Financials recently yielded 5.2%. The ETF, which selects the 10 highest dividend-yielding stocks within each sector (with the notable absence of financial services companies), is weighted more heavily in telecom and consumer staples.
Among its largest holdings are Australia's biggest telecom company, Telstra, Australian brewer Foster's Group and Belgium's Belgacom.
Jeremy Schwartz, the director of research at WisdomTree, said one of the company's fastest-growing ETFs is WisdomTree Emerging Markets Equity Income (DEM). The fund recently was yielding 6.83% and had positions in Taiwan Semiconductor Manufacturing, Banco do Brasil and Brazilian brewer Companhia de Bebidas das Americas.
If ETFs don't suit your strategy, there are about 500 dividend-paying non-U.S. companies listed on U.S. stock exchanges.
Vodafone Group (VOD, news), Unilever (UL, news) and Nestlé (NSRGY, news) are candidates to consider for dividend income, said Kevin Shacknofsky, co-portfolio manager of the Alpine Dynamic Dividend (ADVDX) fund.
Vodafone shares have a yield of better than 5%. Plus in February 2012, Vodafone will pay shareholders a special dividend from a $3.3 billion pool of cash it received from Verizon Wireless, in which it owns a 45% stake.
Unilever, the Dutch maker of food, soaps and other household essentials, yields 3.6%. Nestlé, the world's No. 1 food company, yields 3.3%.
Another dividend-payer worth noting, though one more sensitive to global economic growth, is SeaDrill (SDRL, news), which has a yield near 10%. The company rents its ships and rig equipment to oil companies for offshore deep-water drilling.
One advantage to buying U.S.-listed shares of international companies is that the dividend qualifies for the same favorable tax treatment that shareholders of U.S. corporations receive.
Just be careful when searching for high-yielding stocks, no matter where the company is based.
"I would caution people about chasing yield alone," said Dan Genter, the president of RNC Genter Capital Management, which runs RNC Genter Dividend Income (GDIIX) fund.
This is because troubled companies sometimes pay high dividends to retain investors and help support their stock. But if business gets worse, one of the first things they could do is cut the dividend to preserve cash.
To be sure, there are drawbacks to reaching overseas for a dividend.
Some non-U.S. firms pay a dividend only once or twice a year, while U.S. companies usually pay quarterly. Currency is another issue to manage; if the U.S. dollar strengthens, the non-U.S. dividend would be less valuable.
Bill Staton, a dividend investor and chairman of Staton Financial Advisors, said he feels safer investing in companies regulated by U.S. accounting rules and securities laws.
"Dealing with multinational companies is the easiest way to do it," Staton said. "I prefer buying what I know."
This article was reported by Matt Andrejczak for MarketWatch.
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The American stock and commodities exchange has become a cash cow for the big wealth. In the only year I know about the Saudi royal family. Made 250 billion in our rigged market. The Emir for Kuwait has several hundred billion in that same market. Does it strike anyone else as odd that we spend fortunes and American lives to defend these absolute dictators that run their countries like company stores. At the same time we fight a war in Iraq and claim to be concerned with their freedom. Is there anyone who doesn't think this is bs. Also, does anyone think that corporate boards that give themselves tens and sometimes hundreds of millions in bonuses won' help giant player for a price?
Men who openly state they have no obligation to country ,employees or anyone but shareholders will do anything, including rob shareholders. When the CEO of Disney made 600 million in salary and God knows what in bonuses, he had children in Haiti working for 12 cents an hour.
Our 4 biggest banks have 8 trillion in assets and have been getting billions in 0% loans to play the market. Also, we know they have been manipulating the commodities market and are the main reason for high gas prices. If we had a government they would place real regulations on commodities trading and force our public owned corporations to pay our minimum wages wherever they go. This would bring back jobs and show a little regard for workers.
When someone pays a bank 600k for a 200k house, even when the government guarantees the loan, someone is robbed. All such loans should be made directly for a small interest. That would cut student and home buyer's loans by half or more and leave trillions in the hands of our people instead of thieving banks. Why is it that those who condemn any social aid for the average man never object to the gigantic socialism for the rich that exists.
How can we continue to allow corporations to outsource for slave labor? It is so repugnant to hear our "leaders" clam they can do nothing about our real problems when they, in fact, are helping the very pigs that are destroying America. There are many thing they could do but the will not.
The pigs are united! banks, wall street, insurance companies, hedge funds and the commodities exchange produce nothing and take mountains. They know exactly what they want. "Everything." Combined they are like a giant bloodsucking leech. We better unite against their insane greed or they will take us straight to depression and chaos.What we need is so obvious; We need a government and a financial system that serves instead of rapes our people.
An open an free market only goes so far in justification. Some countries nationalize their resources to stem the tide of run-away inflation and gain a competitive advantage from their resources, be they financial or commodities. As for the flight of investment capital, I agree with you, that governments are aware of this trend and will attempt to reverse it. It is the individual investors, large and small that will bear the lions share of the pain when off-shore financial restrictions are applied. As far as the argument that, our society is in a maintenance mode and greater growth lies elsewhere in the world. True for the moment, but given the emphases of stagnation and regression into a deep global recession, the general tune that the fed, IMF and perhaps Congress will be moving fairly quickly to inject funds into the economy, with all due respect to inflation and debt loan of individual nations. Greater return normally comes with greater risk, so it becomes a matter of does the adventure in unstable nations and questionable enterprises lead to a loss of investment?
With substantial US dollars being closely held in US banks as a hedge for a significant down turn in the economy, maintenance mode, there is significant pressure to invest those funds with a return.
Will that investment be in domestic markets or international higher risk ventures. And if so, in the international high return margins, will the American tax payer be called on to bail out the financial industry when and if things go sour?
Perhaps I misunderstood your term "US investment dollars". In any event let me attempt to restate the argument:
Private investment dollars, as well as corporate capital, in an open and efficient market, will seek out the best combination of risk and reward regardless of location. Currently those flows are leaving the U.S. in ever larger amounts, and individuals and corporations are not automatically villains for taking advantage of fertile fields. The government is well aware of this trend and will attempt to reverse it, either through incentivization or force of law. Our society however, is changing to maintenance mode, and greater growth lies elsewhere in the world.
All such money and capital movements create winners and losers. If you want to play in the global game, you must be willing to accept the results. To attempt to structure the rules to favor yourself or your country over another will only make the entire system less efficient, and ultimately less successful.
While I understand your speed limit analogy, my investing in a Canadian company that supplies electricity, apartment rentals , or even root beer cannot be described as "short-sighted" or "harming the economy" when the dividends paid are generous, the company stable and honorable. As I stated previously, if U.S. companies emphasized dividends more, they would attract more investors. The force of law you mention should focus on preventing investment in say, terrorist groups or nations intent on destroying Israel just as an example.
It would be better for governments to focus on incentives to return capital to their shores, rather than attempting to punish players with the tax code. Such social engineering nearly always ends in failure, as individuals and corporations act in self interest as a matter of natural instinct. The current attitude of resentment and uncertainty by the business community towards the administration is direct evidence of the unhealthy relationship that has developed over recent years. If things get too hostile, or don't present enough opportunity at reasonable risk, those dollars walk--literally--out the door, and that's just the way it works.
I'll pick open free markets even when they result in creative destruction. And I welcome you to make your own free choice as long as it doesn't overtly restrict me.
The flight of US investment dollars is a direct result of gambler mentalities of Wall Street. No one is fooled by their machinations of grandeur and dividend income. The problem is that Americans are unwilling to give up their payroll deductions to fund more and more wealth of those who want to live entirely on dividend income. What kind of nonsense is that? The only way that can happen is if every single employed American hands over their paychecks to cover the constant losses from stupid decisions made by Wall Street's gambling addicts.
How about a little maturity thinking here? No...Wall Street Masters of the Universe can't have ROI yesterday. No. They can't funnel every dime other Americans earn so their stocks, mutuals and other hotcha investments can have a perpetual source of funding. And most of all, NO they can't ignore their investment strategies are major failures and all due to one thing: "I want it and I want it yesterday" syndrome.
This is why the market is bad. When ROI turnaround has to come every 30 seconds, that's as bad as an out of control gambling addict. When the only source of that funding comes from other Americans, that's investment kidnapping. Time for all the genius little Johnny Jump Ups on Corporate Row to grow a little patience if they want others to start investing again.
Greg .. sorry, but that is why we place speed limits on highways, so the out of control drivers don't kill everyone along the trip to get ahead.
Making short sighted investments in off-shore hide-away, that are built on the foundation of American economy, which they are about to sabotage, has a way of coming back to make a vacant beach with the tsunami.
It's not that complicated, folks. Investment dollars naturally find their way to the most profitable, most sustainable companies in the global market.
If U.S. companies paid higher sustainable dividends, more of "our" money would stay here. The reality is otherwise. Why they don't is a separate, complicated subject.
The "flight" others speak of in their comments is a natural process that can change as circumstances change in various markets around the world. Changing the tax code to change behavior (aka restricting freedom of choice) is not progress, only desperation to continue denial of reality.
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