"Is it time to flee dividend stocks?" That's what many investors are asking me amid the recent rise in bond yields.
My answer: Don't abandon dividend stocks, but be selective. I've long been advocating that investors searching for yield should look abroad for dividend income, and I continue to stand by that call. Here are five reasons why:
- Over the long term, dividend paying stocks tend to outperform in both bull and bear markets, according to BlackRock research.
- International dividend income still looks good compared to the alternatives. Even with the recent increase in bond yields, non-U.S. dividend companies still offer more enticing yields than fixed-income and U.S. dividend counterparts. International dividend equities are currently offering 12-month yields of around 3.0% to 4.0% -- higher yields than both U.S. dividend payers and many fixed income instruments.
- The stocks are likely to continue to pay higher yields for the foreseeable future. While I believe the 10-year Treasury yield will slowly rise to about 2.25% this year, I'm not expecting a large increase in bond yields anytime soon as factors keeping a lid on rates -- such as central bank buying of Treasuries and demand for Treasuries from institutional buyers -- are still in place. In other words, in what is likely to remain a low-rate environment, I believe a broad-international dividend fund is still likely to offer a competitive yield.
- The stocks look cheaper than their U.S. counterparts. Valuations of international dividend stocks are still very low compared with those of dividend-oriented U.S. equities. For example, the average price-to-book ratio on the Dow Jones EPAC Select Dividend Index -- primarily composed of companies domiciled in Europe and Asia -- is roughly 1.70, while the ratio is 2.25 for the Dow Jones Select Dividend Index, which is composed of U.S. companies.
- Non-U.S. dividend funds offer international diversification. Non-U.S. dividend funds such as the iShares Dow Jones International Select Dividend Index Fund (IDV) and the iShares Emerging Markets Dividend Index Fund (DVYE) are well-diversified by both geography and sector. Thus, they can be good, broad instruments for gaining non-U.S. international and emerging market exposure.
In short, there's still a strong case for why investors in search of equity income should consider international dividend paying stocks.
Sources: Bloomberg, BlackRock.
Disclaimer: There is no guarantee that dividends will be paid. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.