Inside Wall Street: Attractive foreign dividend plays
Here are 3 companies providing enticingly generous yields.
It might surprise many investors to know that when it comes to paying generous dividends, U.S. equities don't top the list. Companies in Europe, the U.K. and even in some emerging nations provide significantly better yields, according to some Wall Street pros.
The practices and policies of paying dividends vary by region, but yields from companies outside the U.S. are on average generally much higher.
"The average dividend yield across Europe in 2011 was 4.45%, with growth prospects in 2012 of about 13%, compared with the average yield in the U.S. of 2.1%, along with projected growth" of 8%, according to Alex Crooke, a co-manager of the Henderson Global Equity Income Fund (HFQAX). The fund, which delivers a yield of 7%, invests in global income-producing stocks with a focus on non-U.S. stocks.
Henderson Global Equity Income Fund uses "a regional rotation strategy that seeks to capitalize on the seasonality of dividends" and expectations of steadily growing payouts, says Job Curtis, who is also a co-manager of the fund. About 60% of its investments are in Europe, Britain and the emerging nations, such as Brazil.
"Although stock prices can be quite volatile, dividends represent cash in hand, and like most investors, we pursue the stability of high-dividend paying stocks," say Crooke and Curtis. They favor companies in "defensive" sectors where earnings are steady and consistent, with a track record of stable cash-flow generation.
But they make sure they don’t fall into "value traps," where a high dividend yield is unsustainable and could be signaling a company in distress. In some cases, a high dividend yield is merely the function of a collapsing stock price, according to Crooke and Curtis. "So we are very careful in distinguishing between companies with sustainable growing dividends, and companies that aren’t growing enough to be able to maintain their dividend payouts," Crooke says.
Investing in foreign companies that pay robust dividend yields is a way of diversifying a portfolio, as it adds companies with potential for further growth, Curtis says.
Vale, the world's largest and lowest-cost iron ore mining company and the world's No. 2 nickel producer, announced on Jan. 17 that its executive board has submitted to the board of directors a proposal to hike its 2012 minimum dividend payments by 33%, to $6 billion, or $1.17 a share, for both common and preferred shares outstanding. That would be equivalent to a dividend yield of roughly 5%, Crooke figures.
"We think there will continue to be a structural demand growth for steel, of which iron ore is a major component, because of the increasing need for infrastructure spending in the emerging markets, such as China," he says. Being the lowest cost producer provides Vale with larger "margin of error" in staying profitable during periods of declining iron ore prices, Crooke says.
Vale's earnings prospects are attractive partly because of the continuing demand for iron ore in China and East Asia. And the positive outlook for the global nickel market is also a big plus, according to Standard & Poor's analyst Leo J. Larkin, who rates Vale, currently trading at $24 a share, as a buy. He has a 12-month stock price target of $34 a share.
GlaxoSmithKline, one of the world's largest pharmaceutical companies, makes and markets more than 50 prescription drugs across nine major therapeutic categories, including respiratory, cardiovascular and oncology. Currently paying a dividend yield of 5.1%, GlaxoSmithKline is expected to increase the payout by 7.4% this year.
Apart from the hefty payout, Crooke and Curtis favor GlaxoSmithKline for its strong drug pipeline, which includes a number of products undergoing phase 3 clinical studies; a solid balance sheet that enables it to maintain its high dividend; and its steadily improving profit margins. Now trading at $44 a share, this "high-quality defensive stock is cheap, partly based on its strong earnings growth and global footprint," Curtis says.
The stock "garners top marks for price stability," and its strong financial resources "back a generous and growing dividend, which is this equity's major allure," says Jeremy J. Butler, an analyst at the independent investment research outfit Value Line. The stock, which is trading not far from its 52-week high of $46.50 a share, is particularly suited for conservative income-oriented investors, Butler says.
Unilever, a leading worldwide producer of consumer goods, including processed food, personal-care and home products, is expected to boost its dividend of nearly 4% by 5% this year. About 53% of its sales come from growing emerging markets, where its stable and widely known brands are starting to grow fast, including Ben & Jerry's, Slim Fast, Bertolli, Vaseline, Suave, Pond's and Hellman's.
"From a long-term perspective, Unilever has a leading exposure in the emerging markets where per-capita spending is growing rapidly, especially for its food products and home-care offerings, such as bath and shower products," Crooke says. Globally, spending for Unilever's products rises along with the increase in the gross national product. Demand for Unilever's products continues to grow, he adds, because they provide the consumers' everyday needs for nutrition, hygiene and personal care.
The stock, currently trading at $32 a share, is up from its 52-week high of $28.89, is expected to continue climbing "at a respectable rate," says Robert Greene, an analyst at Value Line, as earnings are expected to get a boost from emerging markets, which account for 55% of total revenue. Sales have been strong, he notes, in China, India, Mexico and Argentina.
There's no doubt that dividend stock plays have become almost a necessity in building or bolstering a portfolio, particularly in periods of slower economic growth and high market volatility. So as an added measure of attaining high returns, investors should expand their quest for growth and dividends to foreign markets.
Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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