Going abroad for higher dividend yields
LONG BEACH, Calif., March 13 (Reuters) - Foreign stocks are coveted for the superior growth and value they can offer. Investors have turned to them lately for higher income, too.
Dividend yields can be a percentage point or two greater in overseas markets, making them especially fertile destinations at a time when income-hungry investors need every percentage point they can get.
The Standard & Poor's 500-Stock Index yields about 2 percent, near 60-year lows. Yet if investors venture farther afield, they will achieve yields of about 3 percent on the MSCI Europe Index and 4 percent on the MSCI Pacific ex-Japan Index.
Money managers find the higher yields particularly appealing because they often go hand in hand with greater financial strength and more reasonable prices. The recent outperformance of U.S. stocks helps to account both for their comparatively meager yields and expensive valuations, said Alex Robins, an international equity manager at J.P. Morgan Asset Management.
"There are a lot of parallels" between foreign and American high-yield stocks, Robins said. "(Companies) have huge amounts of cash on their balance sheets, strong profitability and low debt relative to their history. The big difference is that companies outside the U.S. are more attractively valued."
The yield discrepancy is easy to spot when comparing multinational companies within the same industry, said Alex Crooke, director of global equity income at Henderson Global Investors. Despite having a similar business profile, a foreign company is likely to yield more than an American one, Robins said, so "investors get higher yields without taking inherently more risk."
Crooke suggests various reasons for the discrepancy. The dominant investors overseas - the ones local companies must please - tend to be corporate and public pension funds that "demand bond-like returns" and place a greater emphasis on income. Mutual funds and 401(k) plans that dominate in the United States focus more on capital growth.
Asian companies use dividends to convey an image of steady, disciplined stewardship.
"They're generating a lot of cash, they're very profitable, and there's an increasing understanding that investors want to see some of it," said David Ruff, co-manager of the Forward International Dividend Fund. "Showing earnings on a piece of paper is one thing; showing cold, hard cash is something else. If you want to gain investors' confidence, show them that dividend and they'll be much less reticent to invest in your company."
One of his Asian holdings is Telekomunikasi Indonesia , which recently sported a hefty 6 percent yield. The phone service provider is adding 4 million customers a month, Ruff said, and the still-limited use of smartphones in Indonesia should keep growth prospects strong.
Telekom Indonesia's stock has a U.S. listing, as do all foreign companies mentioned here. Most trade as American depositary receipts, bundles of shares priced in dollars. ADRs, like all international stocks, are susceptible to currency movements, a potential shortcoming of investing overseas that fund managers highlight.
Robins recommends several Asian companies, including the Japanese electronic equipment maker Canon Inc, which recently yielded 4.3 percent; Japan Tobacco Inc, which offered 2.4 percent, and Singapore Telecommunications Ltd , 3.9 percent.
Australian mining concern BHP Billiton Ltd appeals to Robert Shearer, manager of the BlackRock Equity Dividend Fund. He likes its 3.1 percent yield and sees BHP as a beneficiary of rebounding global growth due to its exposure to higher commodity prices and proximity to China, a large consumer of industrial metals.
Natural resources also figure in Shearer's preference for two Canadian banks that yield close to 4 percent, Toronto-Dominion Bank and Bank of Nova Scotia. Canada's oil and mineral wealth left its banks comparatively healthy after the financial crisis, keeping dividends up, he explained.
If Asian companies are worried that foreign investors might find them insufficiently mature, in Europe the concern is that they're about to go out of business. With economic conditions there running from listless to moribund, companies have less growth to finance, so healthy ones are more likely to pay special dividends, artificially inflating yields.
Dividend cuts are a big risk for investors who own struggling companies. And because stocks often tank and yields are calculated from payments over the prior 12 months, before the cuts have taken full effect, yields likewise can appear high.
"Europe has been the poster child for what's wrong with dividend investing," Ruff said. "You don't want to fall into the trap of looking at dividends only. They have to be sustainable." He noted that the payout of France Telecom SA "has been cut over 40 percent, and it's probably going to be cut again." The company's U.S.-listed stock has lost more than half its value in the last two years.
Ruff would rather own companies with yields that are moderate but growing, such as Syngenta AG, a Swiss agribusiness concern yielding 2 percent. Other favorites include the British media company WPP Plc, with a 3.6 percent yield, and Lottomatica Group SpA, an Italian provider of gambling technology that he calls a "triple play" for its 3.9 percent yield, healthy dividend growth and potential for price appreciation.
Crooke's choices in Europe include the German industrial conglomerate Siemens AG and two drugmakers, Novartis AG and GlaxoSmithKline Plc, which recently yielded 3.6 percent and 6.2 percent, respectively.
If you're looking for strong, steady dividend payments, the pharmaceutical sector "won't disappoint you," he said, calling those two "quite good defensive holdings with some growth."