Investing internationally is one of the best ways to diversify a dividend growth portfolio. In addition to the benefits of diversifying one's assets into currencies other than the U.S. dollar as a hedge against high inflation and high debt in the U.S. economy, some of the most respected and profitable multinational companies in the world are based outside of the U.S. However, dividend growth investors face two common problems when looking for suitable international stocks:
1) Many foreign governments withhold taxes on dividends paid to foreign investors, which often cannot be recovered if the U.S. investor is holding the stock in a tax-deferred account like an IRA. For example, France withholds 25% and Switzerland withholds a whopping 35%!
2) Many foreign companies pay irregular dividends at long intervals. It is not uncommon for foreign companies to only pay annual or semi-annual dividends and for the dividends to fluctuate up and down based on the current year's profits. These characteristics can make holding foreign dividend stocks difficult for anyone who depends on a regular, stable source of income.
Despite these two problems, there are many foreign companies that do offer American-style dividends that grow from year to year and are paid quarterly. One of the best countries in which to look for these companies is the United Kingdom. The U.K. is home to a large number of profitable multinational companies that have excellent access to U.S., European, and fast-growing Asian markets. Companies there also benefit from a stable sovereign currency, the British pound, that provides a layer of insulation from the current eurozone crisis going on nearby. Best of all, there is 0% tax withholding on dividends paid out by companies in the UK to US investors, solving the first major problem of investing in foreign, dividend-paying companies.
As for the second problem of irregular dividends paid at long intervals, it is necessary to dig deeper into the British market to look for companies that are suitable. Although there is much variety in the way companies in the UK pay dividends, I would like to highlight three excellent British multinationals in three diverse sectors that pay American-style quarterly dividends that remain stable with consistent growth from year to year: Royal Dutch Shell PLC Class B (RDS.B), GlaxoSmithKline PLC (GSK), and HSBC Holdings PLC (HBC).
Royal Dutch Shell PLC Class B - This company is one of the largest integrated oil companies in the world, having a market capitalization of $228 billion. According to its website, it operates in 80 countries. It produces a mix of 52% oil and 48% natural gas, runs 30+ refineries and chemical plants, and has an extensive network of service stations. The ADR shares pay quarterly dividends in USD that stay constant regardless of the current USD/GBP exchange rate, and there is no tax withholding. The current yield is 4.70%, though recent dividend growth has been slow. It has an estimated 2012 P/E ratio of 8.3 according to data from TD Ameritrade.
GlaxoSmithKline PLC - This is one of the largest pharmaceutical companies in the world, having a market capitalization of $116 billion. According to its website, prescription drugs and vaccines account for the large majority of sales, but it also produces consumer products ranging from toothpaste to nutritional healthcare drinks. The British shares pay quarterly dividends in British pounds that remain stable with consistent growth, and there is no tax withholding. The only difference from American-style dividends is that the dividend amounts vary slightly in different quarters in a predictable way. For example, the quarterly dividend payments of the British shares in 2010 were 18p, 15p, 15p, and 16p. This relative pattern of a slightly larger dividend in the 1st and 4th quarters is predictable from year to year, as is the dividend growth. In 2011, GSK's British shares paid quarterly dividends of 19p, 16p, 16p, and 17p, with each quarter having a 1p dividend increase over 2010. Dividends from the ADR shares are not currency hedged, so they can vary slightly when distributed in USD. The current yield is 4.95%, and it has an estimated 2012 P/E ratio of 10.5 according to data from TD Ameritrade.
HSBC Holdings PLC - This company is one of the largest banks in the world, having a market capitalization of $154 billion. According to its website, it has substantial operations across the world. 46% of assets are in Europe, 30% are in East Asia (of which 17% are in Hong Kong), and 18% are in North America. The ADR shares pay quarterly dividends in USD that stay constant regardless of the current USD/GBP exchange rate, and there is no tax withholding. It also has a slightly irregular dividend pattern with predictable dividend growth similar to GSK, but the slightly larger dividend occurs only in the 1st quarter. For example, in 2010 the ADR shares paid $0.50, $0.40, $0.40, and $0.40, and in 2011 they paid $0.60, $0.45, $0.45, and $0.45. The current yield is 4.74%, and it has an estimated 2012 P/E ratio of 7.6 according to data from TD Ameritrade.