Dividend investors often ask whether their portfolio should include any European stocks as European and American companies have differing practices on dividend issuance. The difference usually stems from the fact that American and European investors have different mindsets. When it comes to dividends, American investors prefer stable, solid and predictable dividends, whereas European investors would not mind taking risks with their dividends because they are not as focused on capital growth as much as Americans are. Let's compare dividend practices of some American and European companies.
First we will look at the Dutch electronics company Philips (NYSE:PHG). Last year the company issued dividends of 95 cents per share, yielding 3% based on the share price on the day of issuance. The same dividend would today yield about 5.1% due to stock price changing value. In 2010, the company issued 79 cents per share and in 2009 the company issued 80 cents per share. In 2008, the dividend of the company was $1.10 per share. As you can see, there is not a real pattern; one year the dividend per share goes up, the next year it goes down depending on how well the company is doing.
Let's look at another example, Statoil (NYSE:STO) from Norway. In 2002, the company paid 30 cents per share in dividends, in 2003 and 2004 it paid 36 cents per share, in 2005 it paid 27 cents per share, in 2006 it paid 60 cents per share, in 2007 and 2008 it paid 83 cents per share, in 2009 it paid 44 cents per share, in 2010 it paid 92 cents per share. In the last year, it paid 1.15$ per share. As you can see, there is not much pattern here either.
In contrast, if we look at many American companies that pay dividends we see a trend. Companies like Exxon Mobil (NYSE:XOM), AT&T (NYSE:T), McDonald's (NYSE:MCD), and Intel (NASDAQ:INTC) have very predictable dividend payments that increase the same rate every year. You may be able to predict ExxonMobil's dividend next year, but it would be very difficult to predict the dividend of Nokia (NYSE:NOK) next year.
What does this mean for the investor? There are a few things to consider.
- Many European companies see dividends as a buffer against their stock price falling too sharply. For example, last year Nokia boosted its dividend payments and this action slowed and even stopped the plunge of its share price plunge.
- European companies usually pay dividends once per year, whereas American companies tend to pay it quarterly. Those wanting to collect a total yield would have to hold the stock for all four quarters if they are holding American stocks, whereas they would have to hold a stock for much longer to get yearly yields in European stocks.
- European stocks tend to pay higher dividends in average, but at the same time, they also tend to cut their dividend rates faster when the economy slows down.
- If an investor relies on dividend income for a living, they may be better off with American stocks as one's income will be more stable and predictable. If one investor wants to reinvest and build one's portfolio for years to come, one may profit from European stocks more as they may be more open to "surprises."
- One should study and find out tax implications of buying foreign stocks in order to avoid being taxed twice. Many people forget this important detail and end up losing significant yield to taxes. Remember, most European countries have a much higher income tax than the USA.
- Make sure to watch for the fluctuations in the currency rates. If the Euro lost a lot of value right before one got their dividend payment in Euros, that would potentially cut into one's profits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.