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 30% 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 excellent foreign dividend-paying companies out there. One of the best countries in which to look for these companies is the United Kingdom. The UK 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, I recently wrote an article about three of my favorite UK stocks that have US-style quarterly dividends. Even though many US-based investors prefer foreign stocks that pay dividends in this manner, investing in only stocks with US-style quarterly dividends can be restrictive. There is much variety in the way UK companies pay dividends, and some of the best, most stable UK dividend-paying stocks pay dividends less frequently.
For those investors who wish to diversify into UK stocks and are willing to accept semi-annual dividend payments, I would like to highlight three of my favorite British companies in three diverse sectors paying semi-annual dividends that remain stable with consistent growth from year to year: BHP Billiton PLC (BBL), Diageo PLC (DEO), and National Grid PLC (NGG).
BHP Billiton PLC - This company is the leading diversified mining company in the world, having a market capitalization of $147 billion. According to its website, 28% of sales come from iron ore, 20% of sales come from base metals, and 18% of sales come from coal (metallurgical and thermal). The ADR shares pay semi-annual dividends (spring and fall) in USD that stay constant regardless of the current USD/GBP exchange rate, and there is no tax withholding. The fall dividend is predictably larger than the spring dividend, and there is predictable dividend growth. For example, in 2010 BHP Billiton paid $0.84 in March and $0.90 in September, and in 2011 it paid $0.92 in March and $1.10 in September. The current yield is 4.02%, and it has an estimated 2012 P/E ratio of 7.6 according to data from TD Ameritrade.
Diageo PLC - This company is one of the leading producers of branded premium spirits, having a market capitalization of $71 billion. According to its website, some of its brands include Johnny Walker scotch, Crown Royal whiskey, and Smirnoff vodka. Scotch accounts for 27% of sales, beer for 22%, and vodka for 11%. The British shares pay semi-annual dividends (spring and fall) in British pounds that remain stable with consistent growth, and there is no tax withholding. The dividend amounts vary, as the fall dividend is about 50% larger than the spring dividend. For example, DEO paid 14.6p in March 2010 and 23.5p in September 2010. The lower spring dividend is predictable from year to year, as is the dividend growth. In 2011, DEO's British shares paid 15.5p in March and 24.9p in September, as both dividend payments grew by about 6%. Dividends from the ADR shares are not currency hedged, so they can vary slightly when distributed in USD. The current yield is 2.45%, and it has an estimated 2012 P/E ratio of 17.5 according to data from TD Ameritrade.
National Grid PLC - This company is a utility that provides electricity and gas distribution in the UK as well as in the north-eastern US, having a market capitalization of $36 billion. According to its website, it serves nearly 11 million customers in England and Wales, and nearly 8 million customers in the north-eastern US. The British shares pay semi-annual dividends (summer and winter) in British pounds that remain stable, and there is no tax withholding. The dividend amounts vary, as the summer dividend is about twice as large as the winter dividend. For example, NGG paid 24.84p in June 2010 and 12.9p in December 2010. The lower winter dividend is predictable from year to year. However, the dividend has had virtually no growth over the past 3 years, though it had a pattern of consistent dividend growth before the 2008 financial crisis. Dividends from the ADR shares are not currency hedged, so they can vary slightly when distributed in USD. The current yield is 6.09%, and it has an estimated 2012 P/E ratio of 10.2 according to data from TD Ameritrade.