I have a large portion of my dividend income sourced from international dividend stocks. While you can certainly get exposure to international markets by holding large, U.S.-based multinationals with foreign operations, your international exposure tends to be diluted by the often substantially larger U.S. portion of the business. In my view, there are several strong reasons to consider holding pure play foreign dividend stocks that can be invested in via ADRs (American Depository Receipts) or via stocks trading on the pink sheets.
1. The U.S. doesn't account for the full universe of opportunities. The U.S. is undoubtedly the dominant global market. Still, it only represents half of the global stock market by value. Excluding foreign stock markets effectively excludes close to half of the global opportunities that are available to you as an investor.
2. Exposure to stronger economic growth. The markets of the BRICs (Brazil, Russia, India, and China) have experienced significant economic growth in the last few years, collectively growing in excess of 8% in 2010 and 6.5% in 2011. That's significantly greater than the U.S. has experienced in this time. Having exposure to these economies and companies in these regions allows you to potentially tap into a strong source of income growth, and hence dividend growth. Given that these economies are still in their first legs of economic transformation, that's growth that could continue many years into the future -- unlike their more mature counterparts in the U.S.
In India, for example, ICICI Bank Ltd. (IBN) offers a dividend yield of 1.2% and has been able to grow its dividend some 13% per annum over the last three years, while still with a modest payout ratio of just 22%. With millions in India likely to experience rising incomes over the next decade, the demand for services like personal lending, wealth management, and insurance should continue to experience strong growth that should last many years. For a company like ICICI bank, that should mean rising earnings and increasing dividend payments for some time to come.
3. Transformational business models. Entire industries are now being defined in emerging international markets. Much of the wave of technology innovation that took place over in the U.S. during the 1990s is now being repeated in international markets as the next eBay (EBAY) and Amazon.com (AMZN) are being defined.
Mercadolibre (MELI) is one such company at the heart of defining that innovation. Mercadolibre operates the largest e-commerce marketplace in Latin America. It offers many services similar to what eBay offers, including an online marketplace and payment settlement. Best of all, Mercadolibre also pays a dividend. While the current dividend yield is small at 0.5%, Mercadolibre should benefit for years to come, not only from increasing economic growth and consumption of goods in the region, but also from the trend to purchase these goods online. Interestingly, eBay has an equity investment in Mercadolibre.
4. Foreign currency tailwind. While a wide variety of factors can affect foreign currencies, foreign dividend paying stocks can experience a nice currency tailwind due to declines in the value of the U.S. dollar. Of course, while this is obviously dependent on the specific currency, emerging international economies should continue to grow and attract foreign investment that should lead to appreciation of their currencies relative to the U.S. dollar over time. In fact, its not just emerging market dividend payers that can benefit from such a trend.
For example, the appreciation of the Swiss Franc against the USD for the better part of the last decade has led to a currency-driven acceleration of dividends paid by Novartis (NVS) in USD terms. Novartis dividends have increased some 17% per annum over the last five years, well in excess of the rate of growth of the actual Swiss Franc dividend payments.
5. Diversity of dividend income. International economies are in different economic cycles with different rates of economic growth at any point in time. While the U.S. and Western Europe have experienced low rates of economic growth for the last few years, economies across the Asia-Pacific region have been experiencing strong growth. Investing in international dividend payers can smooth out downturns in the U.S. economy that depress dividend growth.
The Australian economy largely escaped the severe economic impacts of the global recession in 2008-09, and has been growing between 3% and 4% per annum over the last few years. This has enabled Australian dividend payers to post strong dividend growth. While U.S. banks had their dividends decimated during the 2008-09 period, Australian Banks including Westpac Banking Corporation (WBK) cut their dividend payments by around 20% in 2009 and had almost fully restored their dividends by 2010. Of course, many U.S. banks' dividend payments are still substantially below 2008 levels.
6. Higher dividend yields on international markets. Many overseas markets pay out higher dividend yields than U.S. markets. In the Australian market, for example, the ASX 200 currently offers an average dividend yield of close to 5%. The dividend yield for the Dow Jones Industrial Average stood at just 2.7% at the end of 2012. Australia is not unique in having dividend yields greater than the U.S. market. As of 2012, countries such as Switzerland, Sweden, the U.K., and Singapore also had higher dividend yields than the Dow Jones Industrial Average.
7. International equity exposure may increase return while lowering risk. A study by the Schwab Center for Financial Research found that during the period 1971-2011, a mixed portfolio of U.S. and international stocks would have boosted annual returns and lowered risk, compared to holding a basket of just U.S. stocks alone.
While these are some compelling reasons to consider holding international dividend paying stocks, there are certainly some additional considerations that need to be taken into account. Foreign dividend taxation, frequency of dividend payments, and currency risk are all issues that I will explore in a subsequent article on this topic.