As investors’ thirst for income has driven up the price (and lowered the yield) on many dividend-paying stocks, those who have money to put to work in the market have had to search in more obscure places to find yield.
It’s worth your while to consider looking overseas. There are foreign companies trading on American exchanges paying juicy dividends, which should satisfy almost all dividend hunters.
Just like any portfolio, you should diversify your holdings across sectors, market cap size and regions. So if you find some healthy dividend payers in Brazil, don’t load up your portfolio with Brazilian stocks. Add one or two and look for stocks in other countries and regions, as well.
One thing you should clearly understand when investing overseas for dividends is the timing of the dividend payments. In the United States, most companies pay a quarterly dividend. But in other countries, dividends are often paid just once or twice per year.
Additionally, taxes are handled a bit differently. In the United States, when you receive a dividend, you will typically pay a 15% tax rate (although that may change next year). When you receive a dividend from a foreign company, often the government where the company is located will take taxes out of the dividend you receive. Don’t worry – you will not be the subject of double taxation. Although Uncle Sam tries to get his hands on every penny he can, this is one area where he cuts investors a break.
If you paid dividend taxes to a foreign government, you can usually take that as a credit against your U.S. taxes. The tax rate will differ by country of origin. For example, Argentina doesn’t take taxes out of the dividends paid, but Canada mirrors the United States’ 15% rate and Sweden will help themselves to 30% of your dividends. Those taxes are usually taken out before you receive the dividend. If you’re relying on the dividend for income, be sure you know how much you’ll actually receive after taxes.
Also, keep in mind that dividend payments can vary due to currency fluctuation. So even if a company keeps its dividend the same year after year, as an investor who’s paid in dollars, your dividend may rise and fall depending on the value of the currency.
A Couple Good Examples
Now that you have a little background on foreign dividend payers, let’s span the globe to find some solid yields among the planet’s best companies.
GlaxoSmithKline (GSK) – one of the world’s leading drug companies. Glaxo pays a robust 5.9% dividend yield.
Based in the U.K. but with operations all over the world, Glaxo is one of the best-positioned drug companies in emerging markets – a huge growth opportunity. In 2011, the company generated cash flow of 6.3 billion British pounds, while paying out 3.6 billion pounds in dividends, so the dividend payment is secure.
Oil company Royal Dutch Shell (RDS.B) is based in the Netherlands, but is very much a global company. Royal Dutch Shell produces more than three million barrels of oil a day. In addition, it’s expanding its focus into natural gas.
The stock has a 4.8% dividend yield. Last year, the company generated over $10 billion in free cash flow, paying out just over $7 billion in dividends. Politics and the price of oil can impact the company’s earnings and cash flow, but Shell is an energy powerhouse that has proven it can weather even the toughest markets. It actually raised the dividend in 2008 and 2009.
The Bottom Line
International stocks are a terrific way of diversifying your portfolio and obtaining higher yields than might currently be available in domestic stocks of similar quality.
For some great ideas on where to invest, I highly recommend my colleague Karim Rahemtulla’s new book, Where in the World Should I Invest?