Get Your Dividend Growth 'Off The Grid': Part 2 - Planet Earth

by: Five Plus Investor

See Part One

It must be a guy thing.

Every time my husband starts a project, he always pronounces: "This will be a piece of cake!" He then ventures out, without planning or strategy, believing by virtue of his confidence all will go smoothly and quickly.

After 22 years of marriage, I know better. Inevitably, midway into the project, the grumbling begins. The certitude that the task would be easy gives way to the sheer struggle just to get it done. There is eventual accomplishment and satisfaction - but a whole lot of ear-bending on the wife in the process!

I fancy myself, as a lady, as rarely doing this. After all, I gave birth to three children. Labor and delivery are wonderful teachers that every project involves some amount of pain. Then I began to write this article.

I maintain a list of international stocks for my own research purposes, which was the genesis of the article. I thought: since I already have a list in place, "this will be a piece of cake!" I'm glad my husband is currently out of town. He certainly would have the last laugh!

My one day project to create a list of International Dividend Growth stocks turned into two days…then three. By 10:30 pm at night on day three, I could not get this scene from Star Trek out of my mind. The list had gone out of control!

From screeners, to excellent articles by Seeking Alpha author Guraaf, to so many instances of serendipity in finding great stocks without even trying, the list was accomplished. But I cannot pretend in any way that it is complete. For expediency sake, I had to take a few shortcuts. I could not consult every resource in existence. I also had to take a stock screener or brokerage house's word for all metrics, without going directly to Investor Relations to verify every single fact on every stock. As such, I welcome input from my readers on corrections or additions to the list.

All I can say is: this wasn't a "Christopher Columbus on a speedboat" experience. This was a Star Trek, warp speed five adventure to the Galactic Quadrant!

What Is "Off the Grid"?

The "Off the Grid" series is meant to point you to great companies and stocks that are not found on David Fish's CCC List, or that are traded on the major exchanges. Many worldwide companies prefer to make their stocks available on the OTC or pink sheets market, where the regulatory environment is not so stringent. Therefore you will not find CCC selections on the International Dividend Growth list.

A Quick Primer on International Investing

Seeking Alpha author Guraaf has, by far, the best primers on investing in international stocks I have found. If you are unfamiliar with investing in international issues, please see:

There are only two other issues that need further clarification, that are not fully fleshed out in these articles:

Foreign / Ordinary / "F" vs. U.S. Denominated / ADR / "Y"
One of the first things you will notice when you research an international OTC stock is that it ends with either an "F" or a "Y". The difference is no small designation. "F" stands for "foreign", or "ordinary" share (ORD), and the "Y" represents an American Depository Receipt (ADR). A great comparison guide is found in this Schwab article. I will summarize the main points:

  • Foreign / Ordinary / - A good explanation of an ordinary share is found at Fidelity. The "F" stands for "foreign," or an "ordinary" share (ORD). When you purchase an "F" stock, you are purchasing the underlying share of the stock in that particular country. Most of the better brokerage houses allow purchase of these shares; some lower-cost brokerage houses do not. "F" shares have these characteristics:

** Symbols are five characters ending in "F"

** Orders are executed by U.S. market makers, and in U.S. dollars, but are purchases of foreign stocks on foreign exchanges

** Foreign trades are quoted and settled in U.S. dollars

** Dividends are announced in the local currency, not USD

** Dividends are delivered in foreign currency and converted to USD

** Some brokerage houses may apply additional fees to trade

  • American Depository Receipt / ADR / - The best and most accessible explanation of an ADR I could locate was put out by Stora Enso. An ADR is stock issued by a U.S. bank or brokerage firm which holds the shares in a trust. It can either be an exchange-traded share, or an OTC share. The OTC shares with the ending designation of "Y" have these characteristics:

** ADRs are bought and sold on U.S. exchanges

** They are U.S. shares that represent shares in a foreign stock

** There may be additional fees associated with the ADR, applied at the bank level

** ADR dividends are announced in U.S. dollars

** ADR dividends are paid in U.S. dollars

** Dividends held long enough may meet standard for "qualified"

The last three bullet points are especially crucial to understand. If you are a "Keep it Simple, Stupid" investor (like me), you will find ADRs more advantageous to trade, track and understand than foreign ordinaries. You are trading a U.S. stock (correlating with the underlying foreign entity), with U.S. dividends that are both announced and delivered in USD. Often companies will have both foreign ordinaries and ADRs, and when you have a choice, the simplest choice is the ADR.

As such, the International Dividend Growth list will include only the ADR if both entities exist, and designate the dividend announcement in dollars.

Most countries have a dividend withholding tax, meaning a percentage of the dividend you receive is kept as a tax by the country-of-origin. You can recover this fee at tax time by filing a Form 1116, but bottom line is, at least initially, you should plan on subtracting the withholding tax from your total yield. For countries with a stiff withholding tax, this can take quite a bite out of the dividend.

Guraaf addresses the topic of taxes well in this article, so I will only add my personal opinion. In addition to simplifying with choosing an ADR over a foreign ordinary, I prefer issues from low- or no-tax countries. The International Dividend Growth list includes the country and corresponding withholding tax. My personal rule is I don't invest in any issue with over 15% withholding tax. Countries on the list with favorable withholding taxes are:

  • United Kingdom: 0%
  • Bermuda 0%
  • Brazil 0%
  • Hong Kong 0%
  • China 10%
  • Japan 10%
  • Russia 15%
  • South Africa 15%
  • Netherlands 15%

For some investors, sticking with the 15% or under rule may prove limiting. Just be prepared, when investing outside of low/no tax countries, to give up 20 - 35% of your dividend yield.

Another advantage of investing in ADRs is (at least as the tax code stands now), is that the dividends are treated as U.S. dividends, and may meet the standards the qualified dividend rate of 15%.

The Good, the Bad, and the Hopeful

The good news on the International Dividend Growth list is that I was indeed able to locate at least nine stocks with year-over-year dividend growth! Best of all, most of the choices came from low tax countries and are ADRs, so the dividends are announced and received in USD. These are:

  • ICAP Plc (OTCPK:IAPLY) - U.K. financial services company
  • Jaingsu Expressway Co. Ltd. (OTCPK:JEXYY) - Chinese railroad
  • Eisai Company Ltd (OTCPK:ESALY) - Japanese biotech / pharmaceutical
  • NK Lukoil OAO (OTCPK:LUKOY) - Russian oil company

The bad news about researching this list? The lack of YOY growers. So many choices didn't meet the standard of dividend growth. The enormity of choices, with so many not qualifying, made me feel like Captain Kirk in a tribble shower.

Many international companies only offer a 1x per year dividend. This yearly dividend does not act like an income payment, but more like a bonus. This makes it difficult for income growth investors to take these seriously for retirement portfolios. This is not to say the company is not investable; it's just a variable dividend is less-than-ideal when you are planning to use dividend income in retirement.

Another source of bad news is that some popular companies such as E.ON AG (OTCPK:EONGY) and Enel Societa Per Azi (OTCPK:ENLAY) did not make the list. For expediency sake, if the dividend growth was listed as negative, I passed on it (I welcome any corrections in the comments section).

The hopeful news that kept me going, in spite of a tribble thunderstorm: many companies on the list are on track to be 5-year, year-over-year dividend performers in 2013 and 2014. Researching this list brought home the fact that the 2008 financial crisis was a worldwide phenomenon. Very few companies internationally escaped it without either being forced, or having to choose, to reduce their dividend. The great news is that 35 companies - many of them ADRs - will achieve year-over-year growth within one to two years. It may not be long before we have a bonanza of new international dividend growth stocks to choose from.

Wrapping It Up

In addition to our friendly neighbor up north, as profiled in Part One, we have the rest of the world to invest in. If you feel like staying "on the grid," you can choose an exchange traded issue on David Fish's CCC list, such as Novartis (NYSE:NVS), Imperial Oil (NYSEMKT:IMO), Nippon Telegraph & Telephone (NYSE:NTT), or PartnerRe Limited (NYSE:PRE). There is also a wide variety of CEFs and ETFs that keep you in the margin of safety in the U.S. If you are looking for more adventure, international issues are for you. You can be mildly exhilarated like Christopher Columbus on a speedboat, or as "out there" as Captain Kirk on warp speed to the Galactic quadrant. The choice is up to you.

Disclosure: I am long OTCPK:IMASY, OTCPK:KIROY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.