With interest rates continuing to hover at historic lows and thousands of baby boomers retiring nearly every day, finding steady sources of income has become a paramount issue for many portfolios. To that end, many investors have once again tilted their portfolios towards equity income and dividends. Funds like the Vanguard Dividend Appreciation ETF (ARCA:VIG) have gained in popularity and the trend has taken hold. However, the bulk of investors' attention has been squarely on the United States market and some analysts have called that trade "crowded and expensive." Yet, outside of the U.S. it's a different story. Dividend paying stocks still appear cheap and are trading for significant discounts compared to their U.S. sisters. For investors, it might time to look abroad for dividend income.
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Break out the Passport
Investors looking for higher dividend yields may want to turn their attention overseas as international stocks offer some of the best dividend values. Foreign firms have traditionally held a more dividend-friendly culture, paying them to shareholders rather than keeping them as retained earnings. This is evident in the higher yields of international firms. For example, the broad U.S. market S&P 500 SPDRS ETF (ARCA:SPY) was recently yielding 2.01%. That compares to a 3.6% dividend yield for the global benchmark iShares MSCI EAFE ETF (ARCA:EFA). At the same time, the global benchmark can be had for a cheaper valuation versus the U.S. standard.
Aside from current high yields, international dividend payers have a few other benefits as well. First is total return. According to asset manager BlackRock (NYSE:BLK), more than 80% of European returns between 1970 and 2010 came from a combination of yield and dividend growth. Likewise, in faster growing Asia, dividends and dividend growth still accounted for about 60% of total returns over the past 30 years.
Secondly, while the greenback has been on a tear lately, the expected long-term decline in the dollar is another reason why investors may want international dividends in their portfolio. As these dividends are paid in euros, loonies, krona and yen, and then translated into dollars, investors can receive a higher payout as the dollar falls. This allows investors to enter into a quasi "currency arbitrage" transaction and potentially receive higher dividend pay-outs.
SEE: Due Diligence On Dividends
Think Outside of the U.S.
With many investors still clamoring for additional income, the case for adding international dividend payers continues to get stronger. Some international dividend stalwarts like English utility National Grid (NYSE:NGG) or Canada's Shaw Communications (NYSE:SJR) are available as ADRs. However, broader may be better.
For investors looking for a wide sweeping fund, both the SPDR S&P International Dividend (ARCA:DWX) and iShares Dow Jones International Select Dividend (ARCA:IDV) command the bulk of the assets in the international dividend space. Both funds track similar indexes and feature holdings in company's like Italy's Eni (NYSE:E) and Germany's RWE AG (OTC:RWEOY). The main difference between the two funds is that the iShares exchange-traded fund (ETF) only includes developed market nations, while the SPDR includes some exposure to emerging markets, albeit a small percentage. The funds yield a healthy 6.19 and 5.79%, respectively.
With its positive economic trends and population growth, Asia is emerging as the go-to hot spot for growth investors. However, the nation is a fertile hunting ground for income seekers. Firms like Westpac Banking (NYSE:WBK) and China Mobile (NYSE:CHL) offer outsized payments as well as dividend growth. The iShares Asia/Pacific Dividend 30 (ARCA:DVYA) can be used as an over-arching play on some of the region's strongest and highest yielding equities.
Unlike many U.S. small caps, smaller international companies are often star payers due to the "dividend-focus" of many foreign nations. ETF sponsor WisdomTree (Nasdaq:WETF) offers several ways to access these small-cap dividend stars including the Japan SmallCap Dividend (ARCA:DFJ), Europe SmallCap Dividend (ARCA:DFE) and Emerging Markets (ARCA:DGS).
SEE: How To Pick The Best ETF
The Bottom Line
With income still on the minds of many investors, dividend paying equities continue to draw in assets. However, much of this focus has been on U.S. firms. For those still looking for dividend opportunities, the best bets lie overseas. The previous ETFs make adding a swath of international dividends to a portfolio quite easy.
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.