For investors of all ages and investment objectives, dividends help provide a stable source of income or additional shares through reinvestment rather than relying exclusively on increasing share prices to achieve a positive return.
The benefits of dividends increase exponentially during times of economic turmoil and market volatility. They provide a hedge to decreasing share prices. If you’re investing for income they will put cash in your pocket, and if you are seeking to build up your position over time through dividend reinvestment plans you will gain additional shares.
So long as the company itself is healthy, successfully carrying out its operating activities and generating earnings you can expect the dividend to be stable with the possibility of an increased future yield. This is because dividend payments are dependent upon the individual companies operations, not the fluctuations of the stock market as a whole.
For most dividend investors, their search often ends at the US border; however, there are great opportunities for investment in foreign companies for dividend investors.
Adding foreign, dividend-paying stocks to your portfolio adds diversification, and if you invest in companies that operate in emerging markets you add significant growth potential to your portfolio that few domestic companies can offer.
In addition, with the value of the U.S. dollar currently beaten down, investors can benefit from a favorable currency exchange rate when companies pay their dividends in their native currency if that native currency is stronger than the U.S. dollar (such as the Swiss Franc).
This is because when your purchase ownership shares of foreign companies you are most likely investing in the company through an American depository receipt (ADR), which allows you to trade shares of foreign companies in the U.S. through domestic brokerages.
Although your dividends will be paid out to you in dollars, the payment you receive will be based on the conversion of the dividend payment made in the company’s native currency into U.S. dollars.
These 5 companies provide dividend investors great opportunities to add diversity and growth potential to their portfolios:
#1 - BHP Billiton (BHP)
Based out of Melboure, Australia, BHP Billiton is the world’s largest mining company based on market capitalization. The company mines every kind of precious and industrial metals, and has flourished in recent years due to skyrocketing demand for natural resources in fast-growing emerging markets.
BHP currently offers investors a yield of 2.60% so there are certainly better yields out in the market to be had; however, over the long run BHP has the potential to increase its yield substantially and deliver a solid return through the appreciation of the company’s share price in addition to its dividend payments.
Recently, in an interview with CNBC, Evy Hambro, Chief Investment Officer of the natural resources team at BlackRock voiced his belief that mining stocks are stong but cheap, stating:
The strong underlying fundamentals these metal and mining companies are enjoying today, the strong metal prices, the high margins, the great margin growth we have see year on year, and the growth we are going to continue to see in commodities over the next few years, is totally unreflected in the share prices.
Hambro also stated that before mining stocks such as BHP experience the appreciation they are primed for, their management must prove that they know how to properly allocate their cash reserves.
He specifically cited the fact that BHP has been increasing its yield to investors, but he also stated that he would like to see the company’s management add in the flexibility to initiate share buy-backs should the market experience another sell off in order to purchase shares at a low price and return capital to shareholders.
All types of metals are used for developing infrastructure and industrial complexes in developing countries. The gains experienced by mining companies are expected to continue rising as long-term demand for raw materials collides with limited supplies.
Key Statistics for BHP (*Source: Yahoo! Finance)
#2 - Empresa Nacional de Electricidad (EOC)
The company, informally known as Endesa Chile, is South America’s largest private electric utility company, providing power mostly in Chile, Argentina, and Colombia.
The company’s current annualized dividend yield, hovering around 5.00%, compares favorably to similar electric utility companies in the U.S. and has much higher growth potential due to its exposure to Latin America’s emerging markets.
As the area that Endesa Chile services continues to develop, energy demand will shoot up sharply generating revenue and allowing the company to return capital to investors primarily through dividends and perhaps some share buy-backs.
In addition, EOC provides investors with the added benefit of paying dividends in a currency that is expected to continue appreciating against the U.S. dollar. The currencies of resource rich countries in Latin America and elsewhere are likely to see their currency gain against the dollar as they continue to develop.
Key Statistics for EOC (*Source: Yahoo! Finance)
- Dividend Yield: 5.00%
- Payout Ratio: 34.00%
- Return on Equity: 19.63%
- Profit Margin: 20.22%
#3 - Novartis (NVS)
Novartis is the world’s third largest pharmaceutical company. It produces a diverse and broad array of drugs and products including prescription drugs, over the counter medications, and eye care products.
The company's EPS growth over the last five years (+10.21%) trounced the industry average (+2.57%). In addition, Novartis’s cash from operating activities grew 46% from 2008 to 2010.
Another reason Novartis deserves consideration is the location of its headquarters, Basel, Switzerland. The Swiss Franc is currently incredibly strong compared to the U.S. dollar and dividends paid out from Novartis will benefit investors that hold the company's ADRs through a favorable conversion rate.
Key Statistics for NVS (*Source: Yahoo! Finance)
- Dividend Yield: 3.40%
- Payout Ratio: 47.00%
- Return on Equity: 16.49%
- Profit Margin: 17.51%
Unilever is an Anglo-Dutch company that maintains dual headquarters in both London and Rotterdam. You can purchase either British ADRs or Dutch ADRs. The prices may vary due to differing exchange rates between British pounds and euros and the U.S. dollar.
Unilever deals with consumer staples and owns well-known brands such as Dove soap, Ben & Jerry’s ice cream, Lipton and Vaseline.
The company is a dependable dividend payer, having paid dividends to investors since 1937. Since Unilever deals in consumer staples, it is a very low risk investment that provides investors with a 3.60% annualized dividend that has the potential for growth.
Key Statistics for Unilever (*Source: Yahoo! Finance)
- Dividend Yield: 3.60%
- Payout Ratio: 57.00%
- Return on Equity: 33.30%
- Profit Margin: 9.59%
#5 - Vodafone (VOD)
Vodafone is one of the largest cellular telecom companies in the world. Based out of England, the company operates in Europe, Africa, Asia, the Middle East, and the United States.
The company also owns a 45% stake in Verizon (VZ). Through its ownership in Verizon, Vodafone will receive dividends amounting to slightly over $4.5 billion, most of which it plans to pay out to its own shareholders in February of 2012. The company plans to use the remainder of the money to pay off debt.
Vodafone’s P/E (TTM) of 10.61 is much lower than the cellular telecom industry average of 69.61, and lower than the S&P 500 average of 16.55.
The company’s operating cash flow has also increased by 10% between the year end March 31, 2009 and March 31, 2011.
Key Statistics for Vodafone (*Source: Yahoo! Finance)
- Dividend Yield: 5.50%
- Payout Ratio: 54.00%
- Return on Equity: 8.82%
- Profit Margin: 17.36%