Ruff likes the major pharmaceuticals, especially Roche, and he notes they're throwing off dividends between 3% to 6%. The largest position in the portfolio is in Danieli, an Italian steel making equipment manufacturer that he says has strong competitive advantages and a yield of 2.25%. Among Ruff's other favorites is EFG International, a $2.5-billion Swiss private bank with an anticipated future yield of 2%, which he says compares favorably versus other private banks. Another of his top picks is EVS Broadcast Equipment, a Belgian producer of professional broadcast equipment used primarily for sports coverage that sported a $5.5% yield.
Among the risks of overseas investing--whether directly through an American depositary receipt (ADR) or a mutual fund--is currency risk. "If you buy a company based in Europe, it is going to be, in all likelihood, earning a lot of its revenues and profits in euros," says Josh Peters, editor of Morningstar's Dividend Investor newsletter. "It's usually paying dividends in euros. If the euro falls relative to the U.S. dollar, then your income from that company is going to shrink."
Taxes should be another consideration, Peters warns, as many foreign countries levy withholding taxes against dividends paid to foreign investors. And unlike U.S. dividend payments, which tend to be predictable quarterly payments in cash, dividend payment practices abroad are not always consistent. Annual payments are more likely the norm, especially in Europe. "If the firm's earnings drop, the dividend will drop," Peters says.
But not everyone favors the American method. "We don't necessarily like the U.S. approach to paying dividends," Ruff says. He notes that U.S. companies regularly set quarterly dividends, but if they get into a period of weakness where they have to lower that dividend, or the market anticipates them lowering that dividend, the downward price action in the stock can be extensive.
"With foreign companies the dividend policy is often expressed as a payout ratio or a proportion of earnings," Ruff says. "Thus a reduction in the dividend as a result of a mild decline in earnings does not create as much volatility in the stock's price."
Ruff notes that U.S. dividends have increased recently, but have not been restored to levels before the '08-'09 downturn.
And so rests the allure of foreign equities that pay fatter dividends. "Dividends have historically been a major component of total return for long-term investors," says Franklin Templeton's Lisa Myers. "In fact, dividend income and reinvestment of dividends have comprised nearly 70% of global equities' [returns] over the last four decades. So dividends have been very important for long-term investors, and while often overlooked during very strong periods of growth, we expect dividends always will be a substantial part of long-term market returns."