Written by Ben Carlson
One of the biggest fears investors have right now, is that interest rates will rise substantially from their current historically low levels. Many believe this inevitable interest rate increase could lead to the underperformance of dividend paying stocks.
Bonds are directly impacted by an increase in rates, but other income producing investments such as REITs, preferred stocks and dividend stocks could also be adversely affected. See my previous post – The Risks of High Yielding Investments.
Since bond yields have been so low for so long now, dividend stocks have enjoyed a strong rise and have probably attracted many yield hungry investors. This has the potential to push up the prices on some of these dividend stocks to overvalued levels. This could be what we are currently seeing happening to U.S. dividend stocks. This is a topic I covered in more detail, in Are U.S. Dividend Stocks Overpriced?
According to Mebane Faber of Cambria Investment Management, the U.S. stock market is the most expensive stock market in the world by one valuation method.
This means investors who have the majority of their capital in U.S. dividend stocks, could be hit in a rising rate environment, at the same time that these stocks are becoming overvalued.
So how should you proceed?
It’s impossible to predict the timing and extent of a rise in interest rates. However, you can prepare yourself by looking at past cycles of rising interest rates, to see which dividend stocks performed the best.
O’Shaughnessy Asset Management (PDF file) recently released a report detailing their thoughts and research on the impact of rising interest rates on dividend paying stocks.
Since the late 1920s there have been sixteen periods when the 10-year U.S. Treasury yield increased by more than one percent in a twelve month time frame. Rate increases of that magnitude in such a short time frame are what worry investors.
O’Shaughnessy found that during these past rising interest rate environments, U.S. dividend stocks have underperformed the stock market as a whole while global dividend stocks have outperformed their U.S. counterparts.
They also found that dividend paying stocks outside of the U.S. are currently trading at valuation levels almost 25% cheaper than those in the U.S.
So if you are looking for places to reinvest your income or capital gains from U.S. dividend stocks, or are worried about a potential rise in interest rates, you should think globally.
Not only are dividend stocks outside of the U.S. trading at lower valuations, but they offer substantially higher yields.
Blackrock recently put out this chart that shows the yield differential between U.S. and international stock markets:
Canadian, European and Emerging Market companies, all sport higher than average dividend yields as compared to U.S. companies. Investing globally also gives you the added benefit of diversification, if you are heavily weighted towards the U.S. markets in your portfolio.
Thus, looking for dividend paying stocks outside of the U.S. means higher yields at lower valuations.
Ben Carlson manages institutional investments and is the author of the blog A Wealth of Common Sense. Follow him on Twitter @awealthofcs.
11 thoughts on “Go Global for Higher Yield Dividend Stocks”
I think ONLY investing in the country in which one lives is wrong!
John Templeton has been invested around the world (eg, Japan, etc.), as many Americans wanted to invest their money only in the U.S. only.
I think share the money in several countries is important and good.
I myself (I’m from Germany) invest in: Germany, Great Britain, Switzerland and the USA.
Four good and great country!
I agree. The US only makes up a little less than 50% of the world market cap so there are plenty of other opportunities out there. Investors tend to have a short memory and seeing US stocks outperform in the past few years has led many to believe this has to continue.
I’m not saying the US market must go down immediately, but there is probably better long term value internationally right now. Diversification is still the best risk mitigating strategy for most investors.
DS, you are probably more diversifed than most investors – good work! 😉
Yeah nice post. I’m currently invested in USA and Finnish markets but also eyeing to get ahold of German, other nordic countries and Canadian stocks.
(keeping an eye on your portfolio DS for some tips :P, my deutch just needs some brushing up on! )
Hi Life in Center,
you are always welcome! 🙂
I think my english is not better than your german 😉
I’m not really against investing overseas but the amount of risk and the return do have a correlation. You are taking more risk and investing in a market you might not know as much about in return for those higher dividends.
That’s true. But at the end of the day the best way to lower your risk is to buy undervalued investments. Also, If you’re not comfortable buying individual int’l stocks you can always buy diversified ETFs of different countries or regions to round out your global exposure.
But I definitely understand how uncomfortable it can be to invest in unknown markets.
I think “home bias” is an incredibley powerful influence. It somehow leads investors to believe investing in their own country, is somehow safer than investing internationally. Just becuase you see a company day in and day out, doesn’t make it any more safe than any other company.
Japanese investors thought they had the best stock-market in the world, until 1989. Australians can’t possibly understand why anyone wouldn’t invest in their country – the dividend yields are great! BHP is the largest mining company in the world. Then there is Samsung and Hyundai in Korea, European multinationals etc. the list goes on and on…These companies are no less safe than any other large U.S. multinational.
Emerging markets are a different class altogether, which is what I think you meant. 😉
Great post, Ben.
I have held international equities in the past, but have cut back because of unfavorable conditions in the emerging markets. I am now looking into blue chip European stocks as they seem to be better valued.
With tax treaties between Canada and other countries like UK, Australia etc, holding equities through ADRs inside RRSP can provide investors with better yields without a tax hit.
Thanks. Good call on staying away from emerging markets. They’ve been a relatively bad place to be for the past 18 months or so. Europe went through a rough patch as well. Now is a good time to start looking for beaten up names in those places. I agree that it’s much easier for tax purposes to stick with ADRs. Keep it simple.
Just to be aware with holding tax on international dividend stock can be nasty especialy if your yield is high. If you invest in US ETF or ADSR on US market for international stock you will get double diped. So a yield of 3,43% will turn out to be tax by the home country of the stock and the US. Assume a home contry witholding tax at 15%, your dividend will be 3,43*0,70=2,4%.
Don’t forget that international dividend are tax like income in Canada but you can get a tax credit for us witholding tax that you will receive only when you filed your tax and if you think about sending the form, so assuming a tax rate of 40% will end up to be a dividend in a unregister account of (3.43%*0,85)*0,6=1,75% dividend with the tax credit.
RRSP you can get away with US with holding tax but remember that at the end of the day all the money will be taxed as well in the account.
TFSA you can’t avoid the double whammy but you will never get tax on your dividend so it will be 2,4% on 3,43% dividend.
The best way I found to avoid witholding tax on International stock is to hold the stock directly in the home stock exchange of the stock. I am currenly holding RDS.A on the Euronext in Amterdam in a TFSA and as long that I chose the drip option each time a receive a dividend I am dodging the Dutch witholding tax, only the portion that is not been drip is tax by the Dutch on my juicy +/- 6% dividend.
The only down side of this are you won’t get away with a 10$ commision if you chose to do so. On euronext with TD it 29 euro by trade regardless of the account size and there is the currency conversion fee too that you can’t get away with a Norbert Gambit. Also if your with RBC, they only deal on Canadian et US exchange so you can’t do it there and I can’t confirm if Drip are not tax with witholding tax in other stock exchange in the world but I am 100% that Euronext in Netherland dosen’t tax my drip portion.
So for resuming yield are higher on international market but don’t forget the big picture, if you find a similar yield in Canada, choice the Canadian one, unless your not just looking for the yield but for total return but that a other story …
Comments are closed.