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Every portfolio should make a place for foreign stocks. The difficult question is: What percentage of a given portfolio should be devoted to this asset class? Anyone who is an avid follower of financial websites and blogs can attest to the fact that a portfolio percentage allocation to foreign stocks depends upon who and what you read.

A few years ago it was "cool" to have up to 50 percent of one's portfolio in foreign stocks; now many "experts" are only recommending a 10 to 20 percent commitment. Personally, my portfolio has, in the past, approached the 50 percent allocation level. Currently it is closer to 10 percent. It is not that I no longer care for them; it is just that the U.S. dollar has strengthened somewhat and the advantage of receiving dividends in potentially stronger foreign currencies has diminished.

I am always on the prowl for foreign dividend-payers. In general, foreign stocks generate higher yields than do domestic stocks. Foreign stocks generally pay dividends on a semi-annual, or in some cases on an annual basis. Some, although the practice is not typical, pay on a quarterly basis. Depending upon currency conversion rates, when the dividends received are converted to U.S. dollars we can get more bang for our buck.

The current desired foreign stock allocation within the Protected Principal Retirement portfolio is 15 percent. Ten percent is to be distributed among developed nations, and the remainder to emerging market countries. As the U.S. dollar weakens, and as emerging markets become a more favorable repository for investment dollars, the allocation to foreign stocks will increase. This is one reason for rebalancing the portfolio more frequently than just twice a year.

Developed Countries Versus Emerging Markets

Developed countries include those characterized by middle to upper range per capita incomes. Approximately 80 percent of the world's economies can be classified as "developed". Emerging market countries typically are characterized by low to middle per capita incomes and include approximately 80 percent of the world's population and about 20 percent of the world's economies.

Much has been written about the need to invest in the "BRIC" countries. These emerging market nations include Brazil, Russia, India and China. For some reason, even though China is probably the world's second strongest economy, it is still classified as "emerging".

In 1988, Morgan Stanley developed the [MSCI] Emerging Market Indices, a means of measuring markets within these countries. No longer a part of Morgan Stanley, MSCI, Inc. trades as a listed stock, and there are several Exchange Traded Funds (ETFs) that track various country indices.

Some of the more familiar emerging market countries include: Brazil, Chile, Peru and Columbia in South America; Poland, Russia and Turkey in Europe; and China, India, Malaysia, Taiwan and Thailand in Asia. There are certainly others, but these are some that we might touch on in this article. Singapore has been referred to as both a developed country and an emerging market. Pretty subjective.

Where Should We Look?

As with domestic stocks, there are many choices when it comes to researching foreign stocks. Financial Times has a Global Equity Screener (markets.ft.com/screener/customScreen.asp) that is easy to use, and is as good a starting point as I have found.

This site enables one to search by multiple criteria, including: region; sector/industry group; and stock attributes such as market cap, beta, dividend yield (adjustable), consensus forecast, short activity, P/E ratio and others that can be added. The results will usually be linked to the foreign markets on which the stock is traded; however, by typing the stock name into the "Search Quote) box you can obtain the U.S. symbol, if one is available.

Once the symbol results screen is accessed the first screen depicts basic financial parameters for the selected stock. There are additional tabs for: news, business profile, directors, financials and forecasts. Be advised that this range of information is not available for every foreign stock. The information provided on the Financial Times site can be supplemented with that found on Yahoo Finance or other stock sites of your choosing.

With many foreign stocks, you will really have to search to determine dividends, ex-dividend dates and pay dates. This task can be simplified by using the company's website - which may, or may not, be in English. If, like me, you use Google Chrome as your browser, it will automatically translate the website into English.

What Do We Look For?

As with the evaluation of domestic stocks, we should focus on both qualitative and quantitative metrics. Study the company's business, where they are located, local politics, the outlook for their business going forward, and the likelihood of adverse moves on the part of their government.

On the quantitative side, we should look at past and forecast revenues and earnings, dividend trends, dividend tax rates (these can vary widely by country) and the Standard and Poors (S&P) credit ratings for the country. Foreign dividend tax rates can be found here (Deloitte) and credit ratings here (Wikipedia Credit Ratings). Try to stick with countries rated AAA or AA by S&P.

How Do We Purchase Foreign Stocks?

There are a few ways available to purchase foreign stocks. We can buy the individual stock, a closed-end fund focusing on either a single country or region, or by purchase of an exchange traded fund.

When buying an individual stock, it can be purchased directly on that country's stock exchange (you will need a special brokerage account to accomplish this) or you can purchase the American Depositary Receipt (much easier so long as the stock trades in ADRs).

In addition, many brokerage firms charge a premium commission to purchase foreign stocks. Any foreign stock symbol that ends in the letter "f" could be subject to a commission surcharge. For example, Schwab levies a charge of $50 to buy and sell these foreign stocks.

Which Ones?

By now you are probably wondering if it is really worth it to bother purchasing individual foreign stocks. Over the years, I have found it to be advantageous in many instances (energy and resource stocks for example); besides, it will hone your research skills. Combining individual stocks with country or regional closed-end funds is a good approach.

The methodology that I try to employ is to buy individual stocks in developed countries and to gain exposure to emerging markets through closed-end funds. I consider emerging markets to have more risk, and that risk can be spread around through closed-end funds.

At present, the Protected Principal Retirement portfolio contains just four stocks: Seadrill (NYSE:SDRL), North Atlantic Drilling Ltd. (OTCQB:NATDF), Freehold Royalties (OTCPK:FRHLF) and PetroBakken Energy (PBKEF). Each of these have been discussed in prior articles in this series, so you might want to revisit Part IV on MLPs (here) and Part V on Royalty Trusts (here) for additional information.

Both SDRL and NATDF are Norwegian companies (although SDRL is registered in Bermuda), and both are in high growth industries and offer a growing dividend stream.

Seadrill is one of the largest offshore drilling companies in the world. They sport a $20 billion market cap, have a forward price earnings ratio under 12, a 16 percent return on equity, and as of the last quarter, pay $3.28 a year in dividends (less special dividends). SDRL should be announcing the dividend for the most recent quarter in the next week.

North Atlantic Drilling is a SDRL spin-off and specializes in offshore drilling in harsh environments. With a market cap of just under $2 billion, and a forward price earnings ratio of just over six, NATDF currently pays an annual dividend of $.18. It is anticipated that NATDF will list on a U.S. exchange by the end of 2012.

PetroBakken is a Canadian oil exploration and production company with very attractive holdings. They presently pay $.96 per year in monthly dividends, and I believe that there future outlook is a good one.

Freehold Royalties is also a Canadian company that presently produces 60 percent oil. It is also a monthly dividend payer ($.14 a month) and a solid performer.

Using an example in a manner similar to that used in previous articles, here is the overall yield if one were to own an equal number of shares of each of these stocks:

SDRL - 100 shares @ $41.00 = $4100 (less commissions)

NATDF - 100 shares @ $1.80 = $180 (less commissions)

PBKEF - 100 shares @ $13.80 = $1380 (less commissions)

FRHLF - 100 shares @ $19.45 = $1945 (less commissions)

The total cost is $7605, and the annual dividends received would be $610 for an average yield of 8.02 percent.

At present, the portfolio is over weighted in SDRL (which has been purchased incrementally since the price was in the high teens) and NATDF, so the actual current yield is higher.

Where Do We Go From Here?

In researching developed countries for potential stock purchases, there are eight countries in which we have an interest: Norway, Canada, Australia, New Zealand, Poland, Turkey, Switzerland and Sweden. There is currently no interest in European countries that have Euro-based currencies - at least until [IF]things stabilize.

The preference is to seek out energy, natural resource, telecom, infrastructure and utility stocks, among others. Similar sectors are sought for the emerging markets portion of the portfolio with an emphasis on Brazil, Chile, Hong Kong and Singapore.

The foreign stock component of the portfolio is presently being rebalanced, and individual stocks being researched (by country) include:

Brazil - Vale S.A. (NYSE:VALE), AES Tiete S.A. (OTCPK:AESAY)

Australia - Telstra (OTCPK:TLSYY), Duet Group (OTCPK:DUETF)

Bermuda - Ship Finance International (NYSE:SFL)

Canada - Eagle Energy Trust (OTC:ENYTF), PHX Energy Services (OTC:PHXHF), Veresen (OTC:FCGYF)

Emerging Market Closed-End Funds

It appears that emerging markets are performing well once again. As I mentioned previously, the preferred investment vehicle for this asset class are closed-end funds.

There are several emerging market CEFs that are superior performers. These include: MS Emerging Markets Domestic Fund (NYSE:EDD) and Global High Income Fund (NYSE:GHI).

Country closed-end funds that are worth the research include ING Asia-Pacific High Dividend Fund (NYSE:IAE), Aberdeen Chile Fund (NYSEMKT:CH), and Aberdeen Australia Equity Fund (NYSEMKT:IAF), and the Singapore Fund (NYSE:SGF).

It is my intention to generate additional articles on foreign investments as the reallocation process moves forward, but the aforementioned should serve as guidelines for researching and selecting stocks in this asset class.

Disclaimer: FRHLF is also owned in our portfolio. The stocks mentioned in this article are not purchase recommendations; rather they are examples of foreign stocks that might be right for a given portfolio. I am not a registered investment advisor, and the sole purpose of these articles are to provide one possible strategy for those approaching, or presently in retirement.

Source: Protected Principal Retirement Strategy: Retiring Without A Million-Dollar Nest Egg - Part IX