Looking Abroad for Dividend Yield

Jeremy Glaser: Should you look abroad for dividend yield? I'm Jeremy Glaser
with Morningstar.com. I'm here today with Josh Peters, Editor of
Morningstar DividendInvestor to see if it makes sense to go
overseas to look for more income.

Josh thanks so much for joining me today.

Josh Peters: Happy to be here.

Jeremy Glaser: Have you seen a lot of opportunities in non-U.S. stocks when it
comes to dividend yields?

Josh Peters: Well, I'll tell you, there can be. On the surface, there are a lot of
markets internationally that have higher current dividend yields
than the U.S. market does. 3% or 4% is not uncommon. Here our
S&P 500 yields less than 2% a lot of the time.

But that said there's more than just current yield at work. There are
some drawbacks that investors should be aware of before they start
looking abroad for income.

Jeremy Glaser: What are some of the issues that people will face if they're looking
outside of the U.S.?

Josh Peters: Well, currency is a natural one that if you buy a company based in
Europe then it is going to be in all likelihood and earning a lot of
its revenues and profits in euros. It's probably paying its dividends
in euros. If the euro falls relative to the U.S. dollar, then your
income from that company is going to shrink.

And most U.S. investors have U.S. denominated living costs and
other financial obligations to meet, so currency is one
consideration.

Another big one is taxes. Many countries around the world will
have withholding taxes that are assessed against dividends being
paid to foreign investors because they're not getting to tax the
shareholders in their own country. They'll try to tax the money as it
leaves the country.

And then finally, another point to consider is that dividend
payment practices are not always consistent. Whatever the
drawbacks of U.S. dividend policies and they are many, mostly in
the lack of enough cash. You tend to get predictable quarterly
payments. You can pretty much, most of the time, assume that
whatever the company paid last quarter, you should get this
amount this quarter or more.

That's not the case elsewhere in the world where, say in the
continent of Europe, annual dividend payments are pretty common.
And if earnings drop, the dividend will drop. The companies there
will be more likely to, say, hold the dividend payout ration, the
proportion of earnings being paid out as dividends. They hold that
constant, rather than try and hold the nominal dividend rate
constant.

So that introduces some more variability. You might own a stock
for a full year, think you're going to get a 5% yield and then it
turns out to be 3%.

Jeremy Glaser: A lot of investors look abroad because they want less exposure to
the United States Economy. They're worried about U.S.
consumers, worried about debt levels and they want that exposure
to Asia and to Europe.

Is there any other way, if you think it's maybe not a great idea to
buy the international stocks to get that kind of exposure?

Josh Peters: Yeah. I think buying U.S. multinationals and other U.S. companies
that perhaps in some cases have all their operations outside the
United States, a Philip Morris International a great example of that.

They give you the opportunity to have a lot of the advantages to
investing domestically, predictable dividend paying practices. You
don't have withholding taxes. You owe tax on the dividends that
you receive perhaps but you won't have this extra withholding tax
that you might just lose as an investor in a qualified account.

You're going to have your traditional American GAP to prepare
your financial statements. Everything is just a lot simpler. You've
got all the transparency and the built-in advantages of being a
domestic investor. But you're still getting a lot of international
exposure.

Think about the big healthcare companies like Johnson & Johnson
and Abbott Labs, 50% of the business or thereabouts is overseas.
As overseas markets are growing around the world, you get that
growth and you get it translated back into dollars. And if the dollar
depreciates that would benefit you investing in these companies.

Jeremy Glaser: If you're absolutely dead set on buying a dividend-paying stock
outside of the U.S. Do you have any suggestions right now?

Josh Peters: The way I like to think about is that for me to buy something that
is based in a different country where I'm not on the ground, I'm not
watching the same TV shows or reading the same papers, just kind
of being part of another society. I feel like I need a higher hurdle
rate, a higher indicated return which I define as dividend yield plus
dividend growth prospects in order to feel like I'm getting enough
to compensate me for the additional risk.

And one of these companies that has met this hurdle for me is a
utility company called National Grid. It's based in the UK. The UK
is already a pretty good country to go prospecting for dividends
because there's a consistent set of dividend payment practices.

Most companies pay twice a year. They have what's called a
smaller interim dividend then a larger final one. But usually
whatever you get will be at least equal to what you got for that
payment a year ago. So you've got some consistency there.

You also have a tax treaty between the UK and the United States
which means you don't have that withholding tax issue you would
have with buying, say, Nestle, a Swiss company. Or even Canadian
companies, there's a 15% withholding tax you may have to deal
with.

But what I really like about the business is that there's sort of a
natural hedge built into National Grid. About half of the business is
actually here in the United States where National Grid has acquired
transmission and distribution utilities in the Northeast. So I know
how those work. Being a U.S. investor and a U.S. utility customer,
I've got a pretty good idea how those work.

In the UK what you have is a regulatory framework where prices
and revenues and even profits by extension are really set on an
inflation-indexed regime. So if you think about the currency risk
associated with investing a business that half the business is in the
UK, if you saw a big depreciation in the pound chances are you'd
also see some inflation pass through.

National Grid would benefit from that. They would essentially get
that real return restored to them and they would be able to pass on
that higher dividend rate to their shareholders.

So there is a lot of very good things about National Grid as a
business. There are a lot of good things about the UK in general in
terms of structure for those who would look for overseas income.
But the pound has been falling. Britain's got some pretty severe
economic problems. Even there, I think it pays to be picky. But
National Grid is one that I do like.

Jeremy Glaser: Great. Josh thanks for taking the time today.

Josh Peters: Happy to be here.

Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser.