I have written numerous times about the problem facing retirees who seek income to meet their expenses. Last week I looked at Non-Traded REITs and the pros and cons of using them to enhance income streams. Today I would like to look at international stocks as an option.
For many investors, just the words ‘international stocks’ raises a red flag. After all, many investors tend to have a ‘home bias’ when it comes to investing, meaning they want to invest in things that they are familiar with. Not many investors, let alone retirees, are in the know about semiconductor companies in Taiwan or utilities in Columbia. That being said, for investors who are less concerned about where things are located and more concerned about generating much needed retirement income, international stocks should at least be considered as an alternative or a compliment to U.S. stock investing.
Why go global? Because that’s where the economic growth is. While the U.S. muddles around with virtually no growth, there are places in the world that are growing at a decent clip. According to the IMF World Economic Outlook, “According to IMF statistics on actual and predicted shares of global GDP, the share of GDP attributable to advanced economies has fallen significantly-- from 64% in 1996 to 54% in 2008-- and will dip below 50% for the first time in 2014.” Commenting on this report Fidelity adds, “In other words, there has been a fundamental shift in the economic landscape in the last 20 years which has completely altered what was previously a cozy status quo between the ‘haves’ and ‘have not’ spheres of the global economy. Emerging markets have gained an increasing share of global GDP.”
I have mentioned in the past how over the last decade, Asian and Latin American markets have posted very solid returns, whereas the U.S. has provided a zero return for equity investors. Still, many would argue that for investors looking for income, U.S. dividend stocks like a Chevron (CVX) or Pfizer (PFE) are good bets because they continue to pay 3-4% dividends. Well I may not disagree, but we are starting to see an interesting phenomenon vis-à-vis international stocks.
According to an article in Marketwatch:
“In 2008, dividends paid out by companies in emerging markets were less than half of those distributed by U.S. firms and around a third of what European corporations doled out. Midway through 2011 the dividend stream looked markedly different, with Asian firms’ dividend disbursements rising to $175 billion, compared to about $254 billion from the U.S. and $361 billion from Europe, according to figures from WisdomTree and Standard & Poor’s. In the 12 months through May 31, dividends paid by emerging market firms rose 54.6% from the previous year, compared to a 26.4% increase among European companies and 12.6% in the U.S.”
What to Do?
While I am not saying to run out and buy either of these companies, they serve as good examples. Sun Life Financial (SLF), a large Canadian insurance firm pays over 6.2% and Telecom New Zealand (NZT) is near 7.4%. Now for many investors, there is little chance of buying individual stocks, so ETFs may be the asset of choice. iShares Dow Jones EPAC Sel Div (IDV) maybe an option as it yields around 5%.
It goes without saying that investing internationally means that you have foreign currency risk, which if recent history means anything, is actually an advantage. For me the major downside with this strategy is the lack of consistency. By that I mean that when it comes to Coca Cola (KO), you can count on getting a dividend payment once a quarter, on a fixed date, and you know how much you will get. This is not the case with all international dividend payers. Often their distributions swing wildly, and investors shouldn’t always get fooled by yield data that appears in a stock quote, because it’s based on most recent dividend payment only. A great example of this is the WisdomTree Emerging Markets Equity Income Fund (DEM). If you look at their website you will see that it yields over 7.2%. But when you dig a little further you will see that based on the last 12 months of dividends the yield is about 4.6%, and in previous years it was even lower. Not bad but not as advertised.
Speak to your financial advisor to see if you can enhance retirement income by incorporating foreign stocks into your portfolio.
Disclosure: No positions