20
Despite rising in
2013
, yields on most types of bonds
are still at historically low levels, prompting many
investors to look for income elsewhere. One of the
less exotic locations has been the equity markets.
Investors have bought stocks for their dividends for
decades, but that idea fell out of favor in the excite-
ment of the late-
1990
s bull market, as the potential
for explosive capital gains trumped the more prosaic
attraction of a steady but relatively modest dividend.
But two punishing bear markets in the
2000
s shook
investors’ faith in the inevitability of huge stock gains,
and as a result equity dividends regained their appeal.
Stocks that once paid out no dividends or meager
ones now provide reliable income.
Intel
’s
INTC
cur-
rent
12
-month dividend yield is around
4%
, and
Microsoft
’s
MSFT
is close to
3%
. Even
Apple
AAPL
initiated a decent-size dividend in
2012
.
Another source of equity income that may not imme-
diately spring to mind is the universe of foreign
stocks. Many companies based outside the United
States pay higher dividends than those headquar-
tered stateside. One reason, as Alex Crooke, mana-
ger of
Henderson Global Equity Income
HFQAX
,
recently told Morningstar, may be that executive
compensation in the U.S. has tilted more toward
option- and stock-based calculations than it has
in other countries. That arrangement provides an in-
centive for U.S. corporate leaders to focus on in-
creasing the share price of their company’s stock
rather than paying out profits as dividends.
Whatever the reason, investors looking to stock funds
for income should keep international choices in
mind. One need not focus exclusively on international
funds with “dividend” or “income” in their names.
The divergence often shows up even in standard broad-
market index funds. While the purely domestic
Vanguard 500 Index
VFIAX
has a trailing
12
-month
yield of
2
.
0%
and
Vanguard Total Stock Market
Index
VTSAX
paid out
1
.
9%
,
Vanguard Total Inter-
national Stock Index
’s
VTIAX
12
-month yield is
a hefty
4
.
4%
.
The varying payout levels between comparable stocks
in the same sectors help explain that differential.
Exxon Mobil
XOM
and
Chevron
CVX
, which lie near
the top of U.S.-focused Vanguard Total Stock Market
Index’s portfolio, currently have
12
-month yields of
2
.
7%
and
3
.
2%
, not shabby at all in today’s environ-
ment. But the two biggest energy companies in
Vanguard Total International Stock Index’s portfolio,
BP
BP
and
Royal Dutch Shell
RDS
.A, have
12
-month
yields of
5
.
2%
and
5
.
8%
, respectively.
Besides low-cost index funds, international-equity
funds that have Morningstar Analyst Ratings of
Bronze or higher and provide a decent yield are worth
a look. Among such funds are
American Funds
Capital World Growth and Income
CWGIX
,
Third
Avenue Value
TAVFX
, and
Dodge & Cox Inter-
national
DODFX
. Investors should be looking for funds
with impressive potential for returns along with de-
cent yield, and these funds fit the bill.
Of course, not all international funds have generous
dividend yields. More important, choosing a higher-
yielding foreign-stock fund over a lower-yielding
one may not make sense. For example,
Oakmark In-
ternational
OAKIX
and
Harbor International
HAINX
have remarkably strong long-term records as well
as exceptionally talented managers in place. Passing
them up because their current
12
-month yields are
below
2%
may well prove to be short-sighted.
Another caveat: Investors attracted by the higher
dividends paid by some firms overseas should be
wary of the temptation to bypass mutual fund choices
to buy individual very-high-yielding foreign stocks
directly. As in the U.S., an exceptionally high dividend
yield may indicate that the company in question
is troubled, with a justifiably depressed share price
accounting for the steep yield. Such a firm might
find it necessary to cut that dividend fairly soon.
œ
Contact Gregg Wolper at
Foreign Equities Can Round Out Your
Income Portfolio
Income Strategist
|
Gregg Wolper
