Tuesday, November 1, 2011

Spanning the World For The Best Dividend Stocks

Knowledgeable investors will agree that a well-planned asset allocation 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 are one form of 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 international 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. Recently, the weakening dollar has had the opposite effect where I have seen increasing dividends 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:
  • Alpine Total Dynamic Dividend Fund (AOD)
  • 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 AOD 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)
  • Manulife Financial Corp (MFC)
  • 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.

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 decided to create a separate portfolio for international investments and limit my overall exposure. This is a similar approach that I took recently when I created an experimental high-yield portfolio (more on this in a latter article).

In order to start investing in international dividend stocks, I had to have a pool of investments to consider. To that end, I am in the process of building a database of international stocks and a dashboard similar to my dividend growth database. It is still early in the process, but I already added 22 companies including these with yields above 4%:

Shaw Communications (SJR) | Canada | Yield: 4.4%
Shaw Communications is a Canadian communications company that provides broadband cable television, Internet and satellite direct-to-home services to 2.3 million customers.

Vodafone Group Plc (VOD) | U.K. | Yield: 4.6%
Vodafone Group Plc is the leading global provider of international wireless telecommunications services, with assets inWestern Europe and in emerging markets such as India and Africa.

GlaxoSmithKline Plc (GSK) | U.K. | Yield: 4.6%
GlaxoSmithKline Plc is a pharmaceutical company was formed in December 2000 through the merger of British drugmakers GlaxoWellcome and SmithKline Beecham.

TransAlta Corporation (TAC) | Canada | Yield: 5.1%
TransAlta Corp. is an independent power producer and wholesale marketing company owns a portfolio of generation assets in Canada, the United States, Mexico, and Australia.

Astrazeneca PLC (AZN) | U.K. | Yield: 5.2%
Astrazeneca PLC formed via the 1999 merger of Zeneca Group PLC of the U.K. and Astra AB of Sweden, is one of the world's leading drug companies.

Telefonica SA Communications (TEF) | Spain | Yield: 6.3%
Telefonica SA Communications one of the largest companies in Spain, TEF is a leading provider of telecommunications services in the Spanish- and Portuguese-speaking world.

Philippine Long Distance Telephone Co. (PHI) | Philippines | Yield: 6.8%
Distance Telephone Co. provides telecommunications services in the Philippines. It operates in three segments: Wireless, Fixed Line, and Information and Communications Technology.

Telefonos de Mexico (TMX) | Mexico | Yield: 8.4%
Telefonos de Mexico is the largest fixed-line provider in Mexico, and the firm holds a dominant position in the long-distance phone market.

Partner Communications (PTNR) | Israel | Yield: 12.9%
Partner Communications provides mobile telephony and related services based on the global system for mobile communications technology in Israel.

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 AOD, ETO, CNI, TAC. See a list of all my dividend growth holdings here.

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(Photo: ilker)

Tags: [AOD] [BP] [CNI] [ETO] [MFC] [PID] [RY] [SJR] [VOD] [GSK] [TAC] [AZN] [PHI] [TMX] [PTNR]