Tuesday, January 6, 2015

Searching the World For The Best Dividend Stocks

Knowledgeable investors will agree that a well-planned asset allocation model should include a defined percentage dedicated to international investments. As an investor in dividend growth stocks, this has been one of the more challenging allocations within my portfolio.

I have identified several difficulties in locating, acquiring and owning international stocks, including:
1. Number of Dividend Payments per Year
Many international companies pay dividends only once or twice a year - far less than the quarterly dividends that we Americans have grown accustomed to. For me dividends provide feedback as to how well the company is performing. I prefer more feedback to less.

2. The Amount of the Dividend Payments
It is the custom in many countries to payout dividends as a fixed percentage of earnings each year. This will often result in larger overall payouts, but the payouts are irregular. In the U.S. we are accustomed to steady growing dividends, valuing consistency over maximum payout.

3. The Amount and Timing of Taxes on Foreign Dividends
Many foreign countries will deduct their tax before sending you the dividend. Fortunately, most have treaties with the U.S. where you can claim a credit for the tax withheld.

4. Currency Risk
When the U.S. dollar strengthens vs. other currencies, I see a steady decline in the dividends received, even when none of the securities have lowered their local currency dividend. When the dollar weakens, it has had the opposite effect where dividends increase with no change in the declared local currency dividend.

5. Risk of Political Unrest
That wonderful dividend company you found may be located in a not so wonderful country. An unstable geopolitical environment can potentially destroy a company that is under its control.
International Income Exchange-Traded Funds (ETF)/Closed-End Funds (CEF)
In the past I tried to increase my international exposure by purchasing ETF/CEFs with a high percentage of international stocks. Below are three that I currently or have owned in the past:

- WisdomTree Emerging Markets Income (DEM)
- Eaton Vance Tax-Advantaged Glbl Div Opp (ETO)
- PowerShares Intnl Dividend Achievers Ptf (PID)

The problem with this route is the investment quality, or lack thereof. These funds have woefully underperformed my individual dividend stocks. I still hold a token amount of DEM and ETO just to track their performance.

Individual International Income Stocks
If individual stocks are out-performing the above ETF/CEFs then why not focus on individual international dividend stocks? I currently hold or have held the following ADRs:

- BP Plc (BP)
- Canadian National Railway Company (CNI)
- Shaw Communications, Inc. (SJR)
- Royal Bank of Canada (RY)

That is three Canadian and one British company. Not much diversification there. It shouldn't be surprising that the two countries represented above are those whose culture, government and financial markets are most similar to the U.S.

Conclusion
Most international companies that meet my financial criteria are disqualified based on one of the five issues listed above - generally #1. Given the primary goal of my dividend growth stocks is to consistently increase dividend income and the erratic nature of non-U.S. dividends, it was hard to justify adding a non-U.S. stock to my dividend growth portfolio.

To address these problems, I created a separate portfolio for international investments and limit my overall exposure. This is a similar approach that I took when I created an experimental high-yield portfolio.

I hand-picked a pool of investments to consider from the International Dividend Achievers list and built a database of international stocks. Each week I update the database and produce a dashboard similar to my Dividend Growth Stocks dashboard. The database includes 22 international companies including these:

Rogers Communications, Inc. (RCI) | Canada | Yield: 4.3%
Rogers Communications Inc. is a Canadian communications and media company that operates in three segments: Wireless, Cable, and Media. The Wireless segment offers wireless voice, data, and messaging services.

Vodafone Group Plc (VOD) | U.K. | Yield: 6.6%
Vodafone Group Plc is the leading global provider of international wireless telecommunications services, with assets in Western Europe and in emerging markets such as India and Africa.

GlaxoSmithKline Plc (GSK) | U.K. | Yield: 6.2%
GlaxoSmithKline Plc is a pharmaceutical company that was formed in December 2000 through the merger of British drugmakers Glaxo Wellcome and SmithKline Beecham.

Prudential Public PLC (PUK) | U.K. | Yield: 2.5%
Prudential PLC is an international financial services company that provides retail financial products and services primarily in the United Kingdom, the United States, and Asia.

Unilever PLC (UL) | U.K. | Yield: 3.7%
Unilever is a leading global supplier of consumer goods across a wide range of food, home and personal product categories.

I will continue to look for promising international individual stocks. As noted above, there are risks associated with investing abroad, so extensive due diligence should be exercised before buying or selling any security. I will rely on my 401(k) and other portfolios to meet the majority of my international allocation, but believe there is a place for good international dividend stocks.

Full Disclosure: Long CNI, SJR, DEM. See a list of all my dividend growth holdings here.

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(Photo: ilker)


Tags: DEM, ETO, PID, BP, CNI, SJR, RY, RCI, VOD, GSK, PUK, UL,

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