Most investors who understand the merits of Asset allocation also understand the importance of adding an international allocation to their portfolio. The concept is that in “normal” times there is always a market somewhere in the world that is recovering. To meet my international allocation, I have focused on the following areas in my portfolio:
I. International funds in the 401 (k) plan
Many 401 (k) plans offer an international equity fund. These funds typically aim to achieve an investment return as close as possible to the performance of the MSCI EAFE index before expenses. The fund will generally attempt to invest in the securities in the index in the same proportions as they are represented in the index.
II. International Exchange Traded Funds (ETF)
There are several ETFs with a great deal of international exposure. These show an above-average volatility. Below are some funds with significant international exposure:
– – WisdomTree Emerging Markets Income (DEM) | Yield: 4.7%
– – EV Tax Adv Global Dividend Inc. (ETG) | Yield: 6.7%
III. Single international dividend stocks
You can also try to identify good non-US dividend stocks that are trading on a US exchange with an ADR. One place to identify these stocks is on the International Dividend Achievers ™ list.
A company outside of the United States must be incorporated to be eligible for inclusion. Companies must have an American Depository Receipt or a common stock trade on the NYSE, NASDAQ, or AMEX. Businesses must have paid regular annual dividends for increasing five or more consecutive years. I’ve found that most companies outside of the US follow a different dividend model. Here are some of the differences:
– – Many overseas companies pay dividends based on a percentage of profit. This leads to a very erratic cash flow.
– – Many foreign companies only pay dividends annually. I need more feedback. I would hate to wait a full year before I find out that a company is planning to cut its dividend.
– – Most overseas companies pay dividends in their local currency. Most Canadian companies pay constant dividends every quarter, much like companies in the US. However, you pay the dividends in Canadian dollars, so the currency risk rests with the US investor. There is probably much less fluctuation between the US dollar and the Canadian dollar than most other currencies.
IV. US-based stocks with significant international exposure
One way to gain international renown without any of the issues listed above is to hold US-based blue-chip companies with large overseas operations. These multinationals pay quarterly dividends and generally assume currency risk. Below are some large companies with significant revenues outside of the United States:
Colgate-Palmolive Company (CL) is a major consumer goods company that markets oral, personal and household care and animal nutrition products in more than 200 countries and territories. Yield: 2.1%
McDonald’s Corporation (MCD) is the largest fast food restaurant company in the world with around 35,000 restaurants in 119 countries. Yield: 2.4%
Microsoft (MSFT) develops, licenses, markets and supports software, services and devices worldwide. Yield: 1.0%
Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer goods industries. Yield: 2.6%
In the past, I had come to the conclusion that income investing and international stocks don’t go very well together for the reasons outlined above. In the past, my plan has been to focus my dividend income portfolio on US stocks and use my 401 (k) to ensure an appropriate international allocation.
If I find funds with international holdings that are paying a stable / growing dividend, I will add them to one of my income portfolios. I can add a few more international stocks as well, but will limit my holdings due to the instability of their dividends.
I am always looking for ways to improve my portfolio without significantly increasing the risk.
Full disclosure: Long MCD, MSFT, JNJ.
On the subject of matching items
Tags: DEM, ETG, CL, MCD, MSFT, JNJ,