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. I have written a previous article about three of my favorite Canadian stocks with U.S. style dividends. The good news is that Canada is home to many excellent companies with U.S. style dividends, so in this article I will highlight three more of my favorites. I believe investments in Canadian companies are sound since the country is home to a large number of profitable companies with stable earnings and long histories of dividend growth. These companies also benefit from easy access to the world's largest economy to the south, an excellent business climate (it is ranked 6th in the Heritage Foundation's 2012 Index of Economic Freedom), and a currency supported by abundant supplies of oil, gas, and other natural resources. Best of all, there is 0% tax withholding on dividends paid out by companies in Canada to U.S. investors for investments within an IRA. There is 15% tax withholding on dividends for investments not in an IRA, but this amount is generally fully refundable as a tax credit for U.S. investors. For this reason, dividends paid by Canadian stocks act as if there is no tax withholding in all cases, 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 would like to highlight three more excellent Canadian companies that pay U.S.-style quarterly dividends that remain stable with consistent growth from year to year: Bank of Nova Scotia (BNS), Suncor Energy Inc. (SU), and Manulife Financial Corporation (MFC).
Bank of Nova Scotia - This company is the 3rd largest bank in Canada, having a market capitalization of $60 billion. According to its website, it serves 19 million customers in more than 55 countries. The bank generates 32% of revenue from Canadian banking operations, 26% from international banking operations, 21% from wealth management, and 21% from wholesale banking. It has been especially active in Latin America, expanding its presence in Brazil, Uruguay, and Colombia in 2011. Dividends from the dual-listed shares in the U.S. are not currency hedged, so they can vary slightly when distributed in USD based on the USD/CAD exchange rate at the time. However, they are stable in CAD with a predictable pattern of growth. The current yield is 3.96% and the 5-year dividend growth rate is 3.3%. It has an estimated 2012 P/E ratio of 11.4 according to data from TD Ameritrade.
Suncor Energy Inc. - This company is Canada's largest integrated oil sands producer, having a market capitalization of $50 billion. According to its website, Suncor's oil sands production averaged 304,700 barrels/day in 2011, with additional reserves of 6.1 billion barrels and contingent reserves of 17.8 billion barrels. Dividends from the dual-listed shares in the U.S. are not currency hedged, so they can vary slightly when distributed in USD based on the USD/CAD exchange rate at the time. However, they are stable in CAD with a predictable pattern of growth. The current yield is 1.42% and the 5-year dividend growth rate is 19.2%. It has an estimated 2012 P/E ratio of 11.1 according to data from TD Ameritrade.
Manulife Financial Corporation - This company is the largest of the three major Canadian insurers, having a market capitalization of $21 billion. According to its website, the company provides a range of services, including individual life insurance, group health insurance, hospital coverage, mutual funds, and annuities. In 2011, 36% of net income came from operations in the U.S., 34% came from Asia, and 30% came from Canada, suggesting a large emerging markets presence. Dividends from the dual-listed shares in the U.S. are not currency hedged, so they can vary slightly when distributed in USD based on the USD/CAD exchange rate at the time. However, they are generally stable in CAD. The current yield is 4.55% and the 5-year dividend growth rate is negative due to the recent financial crisis, though dividends have been stable between 2010 and 2012. It has an estimated 2012 P/E ratio of 8.4 according to data from TD Ameritrade.