Utilities: Get Dividends Paid in Euros

Don't like what the dollar is doing? Well, don't let Wall Street hold your money hostage. Here's a pile of payers that get you past the dollar doom.

As I wrote in Seeking Alpha a couple of weeks ago, the dollar might be holding up well against a number of currencies including those of some of our key trading partners. But many of us remain more than mildly concerned as we watch the dollar do its current version of the slip and slide against the euro as well as the pound and other key European currencies.

As an investor, you need to set emotion aside and buy or sell based on facts. And while there might be plenty of emotion over the current state of the dollar - the fact is that the euro and the pound are delivering what the dollar isn't.

This means that if we focus on businesses that are based - and earn their keep - in the core markets of Europe, we can not only reap the rewards of getting cash out of the dollar and into rising currencies...but we can also boost our income as we convert dividends that are paid in euros into more and more dollars.

The key is to buy companies with most of their revenues in their local markets, and to make sure that they're going to be steady utility players that will be able to keep paying you to own them not just this year, but for years to come.

Utility Players: Essential for Every Portfolio

In sports, utility players usually don't get many headlines - nor do they get folks lining up hankering for autographs like the big headliners do. But these are the guys on the team that help the headliners to make the big plays and have their photos splashed on the front pages of the sports section.

To be successful, teams have to keep grinding out victories and avoid costly defeats week after week. And usually this comes down to guys without the big numbers, but who perform consistently day in and day out.

The same thing holds true for your portfolio - you need the utility players of the markets.

That means companies with customers who will be there quarter after quarter, year after year - sending in their checks that over time add up to ample cashflows - making it possible to keep sending dividends your way.

Utilities might sound like a boring term for companies that meet this basic criterion of stocks that pay you. So, over the years many in the markets have come up with more appealing terms, including one of my favorites: essential services. And really, when you think about it - an essential service is perhaps the best sort of utility player that you and your retirement portfolio can have on your investment team.

The crucial essential services come down to providing power to keep the lights and heat on, the water running, and your phones and internet connected.

Power, phone and water companies have it made - as long as management doesn't get too bored collecting checks. This means avoiding temptations such as expanding into Wall Street trading schemes, taking on too much leverage, or getting into markets and businesses that aren't in their companies' core competencies.

Unfortunately, over the past couple of decades, many utility players trying to become big headline hitters have struck out - culminating in losses and in some cases even bankruptcy.

So our task as investors is to focus on the utilities that stick to their knitting - or at least are so dominant in their core markets that they can keep going even if a few managers go rogue trying to rev up their numbers in the wrong businesses.

Our Essential Portfolio Picks

Let's start with a couple in Germany that are two of the biggest businesses in their core markets - RWE (RWEOY.PK) and Deutsche Telekom (DT).

Both of these stocks trade all around the world on just about every market. And in the US you can buy them either directly in the OTC market or via ADRs. I tend to like buying the actual shares - because you get more of the dividends without Wall Street taking its cut and you get more control in terms of any voting and share exchanges and rights that might come along.

Don't get nervous about buying the real ordinary shares - often on the so-called pink sheets of the US OTC market. These are the big companies that just didn't want to bother with the NYSE. Watch the bids and offers and put in your orders accordingly to your broker.

RWE has been a long-term favorite of mine that I've recommended over and over again in my past publication postings. And over the years, this electric power provider - as well as its water, petrol and coal operations - keep pumping out the profits and, for shareholders, dividends.

Revenues keep growing by double-digits year after year. And with ample margins the dividends are always well-backed. In fact, the current dividend yield of 7.3 plus percent has been increasing over the past 5 years by over 29 percent per year.

That's not to say that the markets will always be positive on the stock during any series of weeks or months. But over the past year - including all of the messes out there - this stock has generated a return of more than 46 percent. And over the past five years, US investors following my lead have more than doubled their investment with a return of over 115 percent.

Now when it comes to phone companies, Deutsche Telekom isn't one that I've been much of a fan of. But it's a company that continues to perform - in some ways despite the efforts of management.

The key to this company, from an investor's standpoint, is that even with several ill-advised dalliances with new ideas - at its core - Deutsche Telekom is one of the truly essential companies in its core markets. So, it can afford to make mistakes and still keep generating piles of cash which in turn makes it possible to keep paying investors every year.

And with the stock price down a bit - now is one of the times to buy into this steady payer that is throwing off a dividend of more than 8.1 percent.

And while it might not be expected to boost that dividend - it should continue to pay it.

Beyond Germany, France is one of the other core markets of Euroland. And the duo in Germany has two French peers in the phone and energy businesses that will fit nicely into your portfolio.

GDF Suez (GDFZY.PK) and France Telecom (FTE) also trade their ordinary real shares in the US OTC market.

GDF Suez arose from the combining and remaking of Gaz de France and Suez. The company is focused on delivering natural gas and related products in key markets in this core economy.

Revenues are still very solid and on the ascent, with gains running nicely in the double-digits. Margins are fat and steady in its markets, which keeps the cashflow flowing. With low debt and good margins, the dividend rate is well-padded for our certainty. And with a dividend paid semi-annually yielding more than 7.5 percent, it should help to gas up your investment income.

France Telecom follows in line with Deutsche - meaning that it continues to succeed even when it tries to move too far beyond its core businesses.

But with ample revenue and cashflows, the dividends are well-supported and increasing at a 5 year rate averaging over 41 percent gains. The current yield is over 7.8 percent - and of course that's worth even more since it's paid in euros.

Dividends by the Pound

Now, the UK still manages to operate without the euro. Instead, London keeps the pound around and while not quite as impressive as the euro against the dollar, it's still a whole lot more valuable for US-based investors seeking to hedge a bit more against a gloomy buck.

There are two essential services companies based in the UK that are focused on delivering, processing and cleaning the most valuable of natural resources: water.

United Utilities (UU) operates primarily in the regulated water markets in the north and west of the nation. And while much of its industry has gone through the wringer during a host of privatization efforts over the past many years - United keeps pumping and cleaning the water and getting well paid to do it.

Dividends keep coming and right now United gives you a yield of over 7.7 percent - paid in pounds.

Severn Trent (SVTRF.PK) has been the focus of several of my issues this year. Not only does it have a nice core business of delivering and processing the water in its home market - but it has a very industrious subsidiary based in Southeastern Pennsylvania that is going to provide a nice bit of growth.

Its specialty is working on new water treatment operations, including several in China. So on top of the nice steady cashflow from its core water utility operations - this is one utility player that has the potential to become a star player.

With a dividend in pounds paying over 7.2 percent - it makes for a nice, well-watered buy for your portfolio.

Disclosure: Long RWE, DTLSF, GDSZF, FNCTF, UUGWF, SVTRF

Comments

[Uncle Pie:]

Good article-- reliable dividends in currencies other than the US dollar has been the cornerstone of my investment "philosophy" for some time. Not only the Euro and the Pound, but also the Australian and Canadian dollars, the Swiss franc and the Norwegian krone, too. In the utility/telecom category, here are some other names you may want to check out: Canada's Bell Canada Enterprises, BCE, Germany's E.ON, EONGY, Britain's National Grid, NGG, Canada's Pembina Pipeline, PMBIF, Switzerland's telephone company, Swisscom, SCMWY, Spain's Telefonica, TEF, Holland's telephone company, KKPNY. This writer owns shares in all of the above, as well as dividend paying shares of oil companies, drugs companies, banks and insurance companies.

Nov 02 09:03 AM

[mbkelly75:]

An excellent article and Uncle has some good points also. I have also been making new investments in solid, dividend-paying companies that pay that dividend in a currency other than the US Dollar for the same reasons. Mostly Canadian at this time, with some Aussie and Swiss also. I have been checking for Norwegian investments. Uncle Pie - what are your suggestions here? I have avoided the Pink Sheets up until now, but the author makes a good point that I have heard in several other places just recently. I may have to expand my views here. Thanks to both of you for your work here.

Nov 02 09:59 AM

[David Van K...:]

Question: My understanding is that pink sheet stocks do not have the same disclosure requirements as stocks on major exchanges such as NYSE and NASDAQ. So is it true that these companies just don't want to "bother with" the major exchanges, or are there risks associated with them that may not be obvious but could be very real? Just wondering if anyone has information or facts about this.

Nov 02 02:20 PM

[Gaucho420:]

I agree with the logic, but you missed one key thing, unless I skipped over it in the article... you didn't mention the fact that most of these countries will deduct their dividend tax prior to getting your dividend, so the true return dividend wise is lower than you state in the artcle, as France, for example, takes out up to 30% from GDF stock the moment its issued. Most of the time, the foreign governments tax is higher than what you would've paid in the US.

I still beleive in the philosophy and have been investing in it for a while, but your readers should know about the taxes taken out up front as well. I do beleive, however, that you are not double taxed from the US government either, but the foreign tax will probaby be a higher % than what the US government would've taken out on its own.

Nov 02 02:58 PM

[Gaucho420:]

And to answer David, yes, the only reason these companies aren't on the NYSE are the set of rules and fees required to pay to be officially listed. Most of these companies have fairly light volume on the NYSE and it is cost prohibitive for them to pay fees to be fully listed (as well as meet the disclusore requirements), so they go with the OTC.

GDFZY is the world's 2nd largest utility company behind Russia's behemoth Gazprom, and they were listed fully with the NYSE prior to Sarbanes–Oxley Act becoming law, which required more time & money to stay listed with the NYSE. Once that law became 100% enforeceable, for foreign companies with low volumes in the US, Banes-Oxley proved too cost prohibitive given the low volume, so they went with the OTC.

Nov 02 03:04 PM

[StockMaster...:]

Great idea, what about DEM though? Emerging market currencies including Brazil etc. are great and also have lots of utilities in the portfolio. I think for a long term investor there will be more growth of the dividend in DEM than just European utilities. I like dividends, but primarily ones that grow. ABT may be a low yielding stock compared to BMY but in 10 years I think you'll be better off with ABT because of ABT's dividend growth for instance.

Nov 03 12:40 AM

[THofler:]

To Gaucho's point,

My French Total (TOT) gets hit with a 15% div. withholding tax. In an IRA this is lost, but if it were being held in a taxable account, I can declare the withholding on my tax return and get it fully refunded.

My Italian ENI (E) gets hit with a 35% withholding tax. If the total foreign withholding taxes I declare on my return is less than a few thousand dollars, then I get a full refund. If I have a much larger withholding to declare then I only get refunded at the 15% level.

So Total's withholding is good (fully refunded) if I'm a rich guy, but ENI's is not.

I believe that neither the U.K. nor Brazil has any withholding tax.

Does anyone know the story with Germany's withholding tax??

Nov 03 01:23 AM

[buyitcheap:]

Didn't Brazil JUST institute some foreign investment tax within the last month or so?


On Nov 03 01:23 AM THofler wrote:

> To Gaucho's point,
>
> My French Total (TOT) gets hit with a 15% div. withholding tax. In
> an IRA this is lost, but if it were being held in a taxable account,
> I can declare the withholding on my tax return and get it fully refunded.
>
>
> My Italian ENI (E) gets hit with a 35% withholding tax. If the total
> foreign withholding taxes I declare on my return is less than a few
> thousand dollars, then I get a full refund. If I have a much larger
> withholding to declare then I only get refunded at the 15% level.
>
>
> So Total's withholding is good (fully refunded) if I'm a rich guy,
> but ENI's is not.
>
> I believe that neither the U.K. nor Brazil has any withholding tax.
>
>
> Does anyone know the story with Germany's withholding tax??

Nov 04 08:07 AM

[najdorf:]

The U.K. and U.S. have a special relationship on tax that doesn't exist between the U.S. and other European countries. All of the ones that I've looked at will withhold on dividends - Switzerland, Belgium, Netherlands, etc. I believe Germany is included as well.

Japan has a lower rate than the Europeans, around 8% I believe - I don't mind eating this on Nintendo or Toyota in an IRA.

There are two major problems that can arise for U.S. holders who hold international dividend stocks. First, in the IRA the issue is that the IRS doesn't care what happens inside the account - usually a benefit to the taxpayer but here a detriment because you can't take a credit against your U.S. taxes to make up for the foreign taxes. That is, international stocks in an IRA typically become taxable (internationally). As above, the only exception I know of among major nations is the U.K. Second, in a taxable account you may run into mismatches between the U.S. and international dividend tax that hurt returns or add hassles. As long as the U.S. and the foreign country have agreed on a 15% dividend tax rate (e.g. France above), the international stock acts similarly to a U.S. stock once you take the foreign tax credit on your 1040. If the other country automatically withholds at a higher rate, you have to apply to them for a refund which you may or may not be able to get and which may or may not be worth your time. The IRS is not in the business of making you whole on this transaction because they want you to do the legwork.

Nov 04 11:21 AM

[Uncle Pie:]

In Norway, I have Statoil, the national oil company, STO, and Yara, a fertilizer company, the largest producer of nitrogen fertilizer in the world, if I'm not mistaken. Symbol is YARIY. The five-letter symbol ADRs that are called "pink sheet" issues (although I'm pretty sure the pink sheets no longer exist) can be illiquid. Always check the daily trading volume and the spread between the bid and the ask. The best place to do this I am aware of is the Bloomberg website. Just enter the five letter symbol in the "quote" box and you should get a last sale (maybe from the previous day) and a 15-minute delayed bid and ask, and yesterday's trading volume. Some of these may trade thousands of shares one day, and zero shares another day. Some have tight, some wide bid/ask spreads. When in doubt, use limit orders.


On Nov 02 09:59 AM mbkelly75 wrote:

> An excellent article and Uncle has some good points also. I have
> also been making new investments in solid, dividend-paying companies
> that pay that dividend in a currency other than the US Dollar for
> the same reasons. Mostly Canadian at this time, with some Aussie
> and Swiss also. I have been checking for Norwegian investments. Uncle
> Pie - what are your suggestions here? I have avoided the Pink Sheets
> up until now, but the author makes a good point that I have heard
> in several other places just recently. I may have to expand my views
> here. Thanks to both of you for your work here.

Nov 04 03:15 PM

[Uncle Pie:]

Most of the foreign shares that trade with 5-letter symbols in the OTC market (called the pink sheets although I'm pretty sure the pink sheets no longer exist) are ADRs of foreign companies. Because of the Sarbanes Oxley and other regulatory red tape, it costs a foreign company about a million dollars a year in legal fees to be listed so many have just pulled the plug. I bought my Swisscom when it was listed on the NYSE under symbol SCM but they ditched the exchange and the associated fees and now the same ADRs trade OTC under the symbol SCMWY. Foreign companies make their disclosures according to the laws of their respective countries. You can find a lot of information on ADRs at adr.com. "Sponsored" ADRs are ADRs created by a US bank with the cooperation and support of the foreign company. "Unsponsored" ADRs are simply issued by the US bank without the collusion of the foreign company. Some of the OTC ADRs are pretty illiquid. Some trade thousands of shares one day, and zero shares the next. The best place to check trading volume and the bid/ask spread that I know of is the Bloomberg website. Enter the 5 letter symbol in the "quote" box and you should get the previous day's closing price and the current (delayed 15 minutes) bid and ask. And the previous day's trading volume. When in doubt, use limit orders.
Canadian issues that are listed in Toronto trade in the US with five-letter symbols, but they are not ADRs. They are just the US symbols for Toronto listed companies, and most brokers will handle orders for Toronto listed items using the 5-letter symbol. Often there is an extra fee or charge involved. The larger Canadian issuers list their shares on the NYSE and on Toronto, so if you are American you can buy them on the NYSE just like any other stock. The Canadian government withholds 15% of your dividend, but you can claim the tax withheld as a credit on your income tax return, which reduces your tax bill by the exact amount of the tax withheld by Canada. If you receive dividends from a Canadian company in your IRA, there is no withholding tax. I'm not up to date on withholding rules of the other governments. If someone knows of a guide out there, please let me know.


On Nov 02 02:20 PM David Van Knapp wrote:

> Question: My understanding is that pink sheet stocks do not have
> the same disclosure requirements as stocks on major exchanges such
> as NYSE and NASDAQ. So is it true that these companies just don't
> want to "bother with" the major exchanges, or are there risks associated
> with them that may not be obvious but could be very real? Just wondering
> if anyone has information or facts about this.

Nov 04 03:27 PM

[b3rkut:]

do these upfront taxes apply only to US citizens, r to any holder of the shares? i'd rather pay the income tax in my home country on the dividends than 35% on ENI etc. thats a crazy amount of loss.


On Nov 03 01:23 AM THofler wrote:

> To Gaucho's point,
>
> My French Total (TOT) gets hit with a 15% div. withholding tax.
> In an IRA this is lost, but if it were being held in a taxable account,
> I can declare the withholding on my tax return and get it fully refunded.
>
>
> My Italian ENI (E) gets hit with a 35% withholding tax. If the total
> foreign withholding taxes I declare on my return is less than a few
> thousand dollars, then I get a full refund. If I have a much larger
> withholding to declare then I only get refunded at the 15% level.
>
>
> So Total's withholding is good (fully refunded) if I'm a rich guy,
> but ENI's is not.
>
> I believe that neither the U.K. nor Brazil has any withholding tax.
>
>
> Does anyone know the story with Germany's withholding tax??

Nov 14 04:55 PM