Wednesday, April 15, 2009

* International Income Investing

Any investor that understands the merits of asset allocation also understands the importance of including an international allocation in their portfolio. The concept is that in "normal" times there is always a market somewhere in the world rallying. To meet my set international allocation, I have focused on the following four areas of my overall portfolio:

I. International Fund in my 401(k)

This International Equity Index Fund seeks to match the performance of the MSCI EAFE Index which consists of approximately 1,200 stocks in 21 developed market countries outside of North and South America, and represents approximately 85% of the total market capitalization in those countries. When compared to other options in my 401(k), I have been generally pleased with this funds performance over time. YTD Return: (-7.2%)

II. International Exchange Traded Funds (ETF) Within My Asset Allocation Portfolio

The international component on my asset allocation portfolio is in iShares MSCI EAFE (EFA). EFA seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the European, Australasian and Far Eastern markets, as measured by the MSCI EAFE Index. This fund is tracking the same index as my 401(k) above, but with somewhat better results. YTD Return: (-5.1%)

III. Individual International Dividend Stocks

It was my desire to have international representation within my income investments, so I first looked to identify good non-U.S. dividend individual stocks that had an ADR trading on the New York Stock Exchange. To identify these stocks I used the International Dividend Achievers™ list. To become eligible for inclusion, a company must be incorporated outside of the United States. The companies must be have an American Depository Receipt or common stock trading on NYSE, NASDAQ or AMEX. Companies must have paid increasing regular annual dividends for five or more consecutive years. What I found is that most companies outside the U.S. follow a different dividend model. Here are some of the differences:
  • Many Foreign Companies Pay Dividends Based on a Percent of Earnings
    This produces a very erratic cash stream. Consider Unilever plc (UL). Its ADR paid $0.353 in Nov/07, $0.668 in May/08 and $0.33 in Nov/08.
  • Many Foreign Companies Only Pay Dividends Annually
    I need more feedback than this. I would hate to wait a full year before learning a company plans to slash its dividend. Examples of annual dividends include Shenandoah Telecommunications Co. (SHEN), Siemens AG (SI) and Stryker Corp. (SYK).
  • Most Foreign Companies Pay Dividends in Their Local Currency
    Most Canadian companies pay quarterly consistent dividends, similar to companies in the U.S. However, they pay the dividends in Canadian dollars, so the currency risk is with the U.S. investor. There is probably much less fluctuation between the U.S. and Canadian dollars than most other currencies. However, it exists. Consider the last five dividends on Canadian National Railway Company (CNI): Mar/08 $0.223, June/08 $0.225, Sep/08 $0.217, Dec/08 $0.189 and Mar/09 $0.200. The quarterly dividend dropped 10% from Mar/08 to Mar/09 in U.S. Dollars while it increased its dividend 10% over the same period in Canadian dollars.
I am sure there are more, but one exception to all the above is BP plc (BP). BP's ADR has paid a consistent quarterly dividend denominated in U.S. dollars.

IV. International Income ETFs and Income Closed-End Funds (CEFs)

One thought was that a market basket of international stocks in either an ETF or CEF would help mitigate some of the issues above. Many of these created problems of their own. Some such as Alpine Total Dynamic Dividend Fund (AOD) has the option to invest in the U.S. also and when things turned ugly, they brought the cash home. Other funds such as Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) and PowerShares International Dividend Achievers Portfolio (PID) have not performed well as dividend investments. Each has cut its dividend, with PID cutting multiple times. I now question the wisdom of ETFs and CEFs inclusion in an income portfolio, but that is a different discussion.


After much consideration, I have concluded that income investing and international securities don't mix very well for all the reasons listed above. Going forward, my primary focus will be on U.S. equities for my dividend income portfolio. I will use my 401(k) and my Asset Allocation Portfolio to ensure an adequate international allocation. As for the securities that I currently hold, I will individually evaluate the appropriateness of them remaining in my portfolio. Consistent with this methodology, I will remove most International Achievers from the Stock Ideas page, leaving only those that I own or have identified as being an excellent income investment.

Full Disclosure: Long EFA, CNI, BP, AOD, ETO, PID

Tags: [AOD] [BP] [CNI] [EFA] [ETO] [PID] [SHEN] [SI] [SYK] [UL]