Wednesday, September 8, 2010

Four International Dividend Stocks to Consider

International diversification is often cited as a must have for US investors, especially during periods when the dollar index is weakening and the US economy is soft. The rationale behind this idea is that a recession in the US is less likely to lead to recession in all countries. With the increased globalization and ease of capital movements across borders however the benefits of diversification can be rather elusive. This being said however, there might still be an ounce of truth behind the idea of diversifying globally, which might be beneficial to dividend portfolios.

Investing internationally does come with its own peculiarities however. For example the rest of the world seems to be following IFRS accounting standards, while US companies report under US GAAP. In addition to that, US investors could be subject to withholdings on foreign dividends received, which could only be deducted in taxable accounts. Furthermore, most foreign companies pay dividends in local currency, which is then translated into US dollars, before being remitted in investors’ brokerage accounts. This could lead to volatility in the US dollar dividend incomes of investors, whereas the dividend income could have been flat or rising in the foreign currency.

In order to make investors comfortable with investing internationally, I typically focus mostly on foreign shares which trade on US exchanges. That way investors would not have to worry about setting up foreign accounts with brokers abroad. However if you wish to start a portfolio consisting of telecom stocks from all countries in Eastern Europe, then this article is not for you. The differences between US and foreign based companies traded on US exchanges are the most I would like to worry about.

The starting point in a dividend growth portfolio selection could be found in the International Dividend Achievers index. It consists of shares of foreign companies traded on US exchanges which have consistently increased dividends for at least five consecutive years. Enterprising investors could also scour lists of major companies and check dividend histories in order to uncover stocks which might not be in this index, while still being traded on US markets. I have highlighted several foreign companies I own, which have a history of consistent dividend increases:

Diageo PLC (DEO) engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine. This international dividend achiever has raised dividends for over one decade and yields 3.50%. (analysis)

Unilever PLC (UL) provides fast-moving consumer goods in Asia, Africa, Europe, and Latin America. This international dividend achiever has raised dividends for over one decade and yields 4.10%. (analysis)

Royal Dutch Shell Plc (RDS.B) operates as an oil and gas company worldwide. The company explores for, and extracts crude oil and natural gas. The company is not on any dividend indices, despite its long history of consistent dividend increases. The yield is 6.20%.(analysis)

Nestle (NSRGY) engages in the nutrition, health and wellness sectors. This international dividend achiever has raised distributions each year since 1997. The stock currently yields 2.80%.

When I select international dividend stocks I typically use the foreign currency to determine whether the dividend was being increased for several consecutive years. I find that relying only on US dollar amounts for dividends paid produce volatility in income which could mostly be attributed to exchange rate fluctuations. While Investors in ADR’s such as the ones listed above will receive their dividend in US dollars, the history of dividend increases was generated in their respective foreign currencies.

Another issue that I have uncovered is that some companies pay distributions on a different schedule than US companies do. Nestle for example pays dividends once per year, while Diageo (DEO) pays dividends twice per year. Diageo’s first half dividend is always lower than its second half dividend, which somehow always manages to scare novice investors, who tend to assume that the distribution was cut.

Relevant Articles:

- Best International Dividend Stocks
- International Over Diversification
- International Dividend Achievers for diversification
- Buy and hold dividend investing is not dead

3 comments:

  1. These stocks may be quite good for a conservative covered-call or cash-secured put program, which combines dividend collection with option premium income. I will be sharing this article with the readership of my site, www.safe-options-trading-income.com.

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  2. Wow, thanks for the advice. My portfolio could use all the help it can get.

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  3. I just started thinking about diviersifying with international dividend stocks and saw your article. Coincidence! Why did you choose RDS.B and RDS.A? Does it have to do with tax withholdings? Also what's a good resource to learn more about international tax laws that foreign dividends are subject to as a US investor? Thanks!

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