Look Across The Pond For Big Dividends

By Aaron Levitt | February 07, 2012 AAA

In our current environment of ultra-low interest rates, those looking for income from their portfolios have had to expand their horizons in order to meet that need. Everything from real estate investment trusts (REITs) to high yielding bank loan funds have become commonplace in many portfolios. Funds like the Guggenheim Multi-Asset Income (ARCA:CVY) have become popular additions for many investors.

Given that the Fed has signaled no rate increases until 2014, that search for income will continue. However, one developed market is giving these income seekers another reason to get global when it comes to finding dividends. (For related reading, see 4 Steps To Building A Profitable Portfolio.)

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Surging Dividend Growth
Dividend and income investors may want to cross the ocean and consider the United Kingdom in their search. While the developed market does face similar problems as the United States, there has been a recent string of good news for the U.K. That includes surging corporate earnings and rising dividend payments.

According to research firm Capita Registrars, companies within the United Kingdom returned more than $105.6 billion to shareholders in the form of dividends in 2011. Total gross dividends rose about 19% for the year versus 2010 and surpassing their previous highs in 2008. In their report, Capita said that broad growth across a variety of sectors helped spur the dividend growth. Many corporations in the U.K. have strong historical ties to emerging markets in Asia and economic growth in those regions have helped boost these companies' bottom lines.

In addition, many financial firms, after suspending dividends during the credit crisis, have resumed payments. Also resuming their dividend stream was oil producer BP (NYSE:BP). The integrated oil giant paid over £1.8 billion more in dividends in 2011 than it did in 2010. BP's expanded distribution accounted for more than one-sixth of the total increase in dividend payments by U.K. stocks.

"Record dividends are providing a real bright spot for investors against a very gloomy backdrop," said Charles Cryer, chief executive of Capita Registars.

That bright spot may be getting even brighter. Over the next year, Capita predicts that payments will rise an additional 11% to roughly $118 billion. The firm estimates that more special payouts will boost this amount and companies will succumb to shareholder pressure to return more cash as payouts rather than use it for expansion in these uncertain times. (To learn more, read How And Why Do Companies Pay Dividends?)

Paying in Pounds
Given the recent surge in dividend activity from corporations in the United Kingdom, investors may want to consider adding a swath of the income payers. As one of the largest developed markets, investors do have a lot of choice when it comes to adding the U.K. to a portfolio. The iShares MSCI United Kingdom Index (ARCA:EWU) tracks 106 different firms including bank HSBC (NYSE:HBC) and mega-miner Rio Tinto (NYSE:RIO). The ETF yields 3.32%, beating the S&P 500, and could be used as a starting point. However, many individual firms offer big yields as well.

Analysts estimate that telecom Vodafone Group (Nasdaq:VOD) will be the U.K.'s top dividend payer in 2012. The world's largest mobile operator by revenue will pay shareholders a £2 billion special dividend in February based on earnings from its holding in Verizon (NYSE:VZ). Capita predicts that including the special payment, Vodafone will distribute more than £7 billion in 2012. Shares of the firm currently yield about 3.5%.

Mining firms within the nation increased dividends by more than 88% in 2011, as high commodity prices boosted earnings. With long-term natural resource demand still in place, these firms should be able to continue their payout rising streams in the future. Anglo American (OTCBB:AAUKY) resumed paying a full year of dividends and British-listed BHP Billiton (NYSE:BBL) yields roughly 0.5% more than its Australian twin (NYSE:BHP) at about 3.3%.

The Bottom Line
For income seekers, the United Kingdom could be just the place they are looking for. Improving earnings has resulted in tremendous dividend growth over the year and analysts predict that this trend will continue. For investors, the previous firms along with British American Tobacco (NYSE:BTI), make ideal choices to gain some yield and dividend growth. (For more information, check out Dividend Facts You May Not Know.)

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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