Among other securities currently suffering the recent global equity roller-coaster ride are dividend-paying stocks and funds. Like most value-oriented strategies, dividend-yielding investments have performed poorly during the current downturn. One need look no further than at U.S. financials, with their rich yields, or at global financials and telecoms, whose stock values have dropped precipitously this year along with those of emerging market stocks.
But even though some of these funds are off considerably this year, many value managers think this might be a great time to buy-that it might even present the best opportunity in a generation. Worldwide dividend-yielding stocks are very cheap, they note.
Investors and financial advisors can view the international dividend opportunity in two ways: as a component of a total return strategy or, separately, as an income or yield strategy, and a complement to the international side of one's portfolio. Thus a dividend strategy could effectively be paying you to wait: If an equity pays out a 6% yield, you're earning money while you wait for its stock price to go up.
Take, for example, the stock of AT&T, off nearly 39% this year through mid-October. Its dividend has risen to a juicy 6.3% with a P/E multiple of 8.7 times 2008 consensus estimates. "One could argue this is a cheap stock; the holder is being paid to just sit and wait," says Elliot Larner, an analyst at value shop Tweedy, Browne Co. LLC.
Likewise, Vincent McBride, a partner at Lord Abbett and the portfolio manager of its International Core Equity Fund (LICAX), is following the same rationale. In a report, he cites data from the S&P International Dividend Opportunities Index that suggests devoting 20% of an equity portfolio to an international dividend strategy could offer better returns and lower risk than a portfolio that is 40% invested in the MSCI EAFE Index and 40% in the S&P 500 index.
A similar line of thought is pursued in a Tweedy, Browne white paper, "The High Dividend Yield Return Advantage" (www.tweedy.com/whdyf/). Ditto for a recent Citigroup Global Markets report says dividends since 1970 have accounted for 30% of annualized returns from equities (37% in the U.K.), and "have become more important when equity markets are weak."
Though small, the universe of these funds is growing. This past September, giant mutual fund shop American Funds, which rarely trots out new portfolios, launched the International Growth and Income Fund (IGAAX), its 31st fund and the first stock portfolio it has introduced in ten years.
Neither Morningstar nor Lipper Inc. has a specific category devoted to foreign dividend-paying funds; instead, these portfolios are spread out into different classifications. "They work well as part of a total dividend strategy because those dividends give [the managers] the cash to invest. They're able to buy stocks at lower prices, so it forces you to dollar-cost average," says Bridget Hughes, an associate director of fund research at Morningstar.
While companies in the U.S. have historically tended to retain more of their earnings to fund internal growth or buy back shares, international companies have paid out a greater portion of their earnings in the form of cash dividends. According to research firm FactSet, as of October 1, 2008, 356 companies outside the U.S. with a market cap greater than $2 billion were offering dividend yields of more than 6%, versus only 90 such companies in the U.S.
Foreign Vs. U.S.
Why do foreign companies pay higher dividends? McBride explains: "For cultural reasons, many European, Australian and Asian companies pay out a large percentage of their earnings in the form of dividends. It's a function of history and culture." U.S. companies, on the other hand, despite long periods in the past when they were willing to pay out more from their earnings, have recently been "more inclined to do buybacks as opposed to paying dividends," he says. U.S. companies have also retained more earnings to plow them back into the business.