Most people would agree that an asset allocation should include a defined percentage dedicated to international investments. As a dividend investor, this has been one of the more difficult allocations within my portfolio. I have identified several difficulties in locating, acquiring and owning international stocks:
1. Number of Dividend Payments per Year
Most international countries pay dividends only once or twice a year – far less than the quarterly dividends that we Americans have grown accustomed to. For me dividends are one form of feedback as to how well the company is performing. I prefer more feedback to less.
2. The Amount of the Dividend Payments
It is the custom in many international countries to payout dividends as a fixed percentage of earnings each year. This will often result in larger overall payouts, but the payouts are irregular. In America we are accustomed to steady growing dividends, valuing consistency over maximum payout.
3. The Amount and Timing of Taxes on Foreign Dividends
Most foreign countries will deduct their tax before sending you the dividend. Fortunately, most have treaties with the U.S. where you can claim a credit for the tax withheld.
4. Currency Risk
Recently as the U.S. dollar has strengthen vs. other currencies, I have seen a steady decline in the dividends received, even though none of the securities have lowered their local currency dividend.
5. Risk of Political Unrest
That wonderful dividend company you found may be located in a not so wonderful country. An unstable geopolitical environment can potentially destroy a company that is under its control.
International Income Exchange-Traded Funds (ETF)/Closed-End Funds (CEF)
I have tried to increase my international exposure by purchasing ETF/CEFs with a high percentage of international stocks. Below are three that I currently own:
- Alpine Total Dynamic Dividend Fund (AOD)
- Eaton Vance Tax-Advantaged Glbl Div Opp (ETO)
- PowerShares Intnl Dividend Achievers Ptf (PID)
The problem with this route is the investment quality, or lack thereof. These funds have woefully underperformed my individual dividend stocks.
Individual International Income Stocks
If individual stocks are out-performing the above ETF/CEFs then why not focus on individual international dividend stocks? I currently hold the following ADRs:
- BP Plc (BP)
- Canadian National Railway Company (CNI)
- Manulife Financial Corp (MFC)
- Royal Bank of Canada (RY)
That is three Canadian and one British company. Not much diversification there. It shouldn’t be surprising that the two countries represented above are those whose culture, government and financial markets are most similar to the U.S. Most international companies that meet my financial criteria are disqualified based on one of the five issues listed above – generally #1. I refuse to buy a dividend stock that pays less frequently than semi-annual.
If the numbers do not work, you should never force-buy any security just to meet an allocation. I will continue to look for promising international income ETF/CEFs and individual stocks, but I will not buy any securities below my minimum standards. I will rely on my 401(k) and capital appreciation portfolio to meet the majority of my international allocation.
Disclosure: Long AOD, ETO, PID, BP, CNI, MFC, RY