Financial advisors in search of attractive dividend yields and portfolio diversification for income-hungry clients may want to look abroad at the rising number of international companies offering sustainable and growing dividends.

The universe of foreign companies paying dividends has grown substantially in the past few years. As some U.S. companies have been forced to slash payouts due to the financial crisis, foreign corporations with healthier finances have been increasing dividends. This could prove even more relevant, particularly if the global markets start trading sideways and demand for dividend-paying investments increases, market observers say.

"With overseas markets consolidating 2009's sharp gains, we think it's a good time to revisit the benefits of long-term dividend compounding," Alec Young, Standard & Poor's international equity strategist, said in a recent report. "While big rallies grab headlines, equity markets spend a lot of time trading sideways, highlighting the importance of being paid to wait. Understandably, investors closely track overseas equity price movements, but our analysis indicates they should be just as focused on dividend growth and sustainability, in addition to making sure they are regularly reinvesting the proceeds."

Toward the end of this year's first quarter, international equities on average yielded 2.5% versus 1.9% for the S&P 500 index, according to S&P. Money managers cite attractive dividend returns of 3% to 4%--or higher abroad--as potentially alluring to income-seeking investors, especially those near retirement or in retirement who face domestic yields close to zero on many government securities and money market funds.

But of course, there are a few caveats with international securities such as currency, political and payment risks.

And yield should be only one factor in your investing decision, says Diane Pearson, an advisor at Legend Financial Advisors Inc. in Pittsburgh. "We've gotten involved in more and more country sectors. Yield isn't necessarily the focus in all cases. We use a bottoms up strategy," she says. "What we're looking at first is the manager of the fund, the history of the fund, and the theme of the fund, not just the yield itself."  

Where The Pros Go    
At the country level, many money managers are avoiding struggling eurozone countries such as Portugal, Ireland, Spain, and Italy amid fears the Greek debt crisis could spread. But they continue to invest in such countries as Germany and France, which remain in better shape. Others are buying securities in places like Scandinavia and Switzerland, whose currencies aren't tied to the euro. Asia is also a dividend favorite.

Lisa Myers, who manages the equity portion of the Templeton Income fund, says she's finding attractive values in Europe and Asia--along with the U.S. Within the portfolio's European exposure, Myers likes the healthcare, technology and telecom sectors. One of her top picks, Roche, the Swiss pharmaceutical company that recently purchased Genentech, has a good drug pipeline and had a solid 3.4% dividend yield. Other high-yielding drugmakers in her portfolio include Sanofi Aventis (4.2%) and Merck (4%).

Technology companies in Europe, Asia, and the U.S. also have abundant cash flow streams now being devoted to dividends. "Whether it is Microsoft or Compal Electronics or Taiwan Semiconductor, technology stocks have more net cash on their balance sheets than any other sector, despite what has been a period of weak tech spending by companies," Myers says.

Among this grouping, Taiwan Semiconductor's stock recently yielded 5%, while Compal and Microsoft yielded 3.5% and 1.8%, respectively. "We've been convinced that productivity enhancing tech spending would pick up as companies ran out of cost cutting opportunities coming out of the financial crisis, and we have seen this beginning to occur," Myers says. "So while tech stocks have been performing quite well, current free cash flow yields are still at historically high levels, making these stocks look very cheap."

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