Why We’re Looking Overseas for Income

I recently announced a major shift in my premium newsletter, High-Yield Investing. To put it simply, I’m going global.

Now, a decent number of the current holdings in my premium newsletter, High-Yield Investing, are based abroad.

[ad#Google Adsense 336×280-IA]But we simply haven’t made looking for foreign yielders a major focus. We’re going to change that.

Most investors automatically assume that U.S. dividend payers are the best. Not so fast. As I’ll explain in a moment, by only looking at American companies for income, you’re severely limiting your choices.

By changing the directive of my newsletter from primarily U.S.-focused to a global focus means I now have the freedom to leave no stone unturned in the search for income.

That means my subscribers can now rely on one source to build a well-rounded portfolio and truly earn the highest dividends the world has to offer.

The Case For International Income

For a variety of reasons, the average publicly traded large-cap U.S. firm carries a lower dividend yield than those in many other countries. That doesn’t mean you can’t find plenty of excellent high-yield opportunities on American soil; some of the world’s best high-income stocks are U.S.-based.

But to truly maximize the income-generating power of your portfolio, it makes sense to diversify geographically with smart investments in foreign securities. After all, more than half of the world’s market capitalization now lies in non-U.S. stocks — and in many countries, higher-yielding stocks are the norm, not the exception.

Another reason to look overseas: faster economic growth. The U.S. economy is expected to grow only slowly in the coming years, but many other nations are expected to grow much faster, making now a perfect time to increase your overseas exposure. Although we may not see a repeat of the enormous gains enjoyed by many international stock markets over the past several years, the party is not over by any means.

The average stock in the S&P 500 Index — the benchmark for U.S. large-cap stocks and thus a reliable proxy for dividend-paying U.S. stocks — sports a dividend yield of just 2.1%. But in many countries around the world, the average stock offers a significantly higher yield.

This phenomenon has occurred for three main reasons:

1) Until 2003 the U.S. government taxed dividends as ordinary income — creating an incentive for companies to deploy excess cash in other ways. It’s simply part of U.S. corporate culture for CEOs and directors to make acquisitions, repurchase shares or expand the business rather than pay dividends to shareholders. After all, these shareholders would immediately lose a portion of those dividends to Uncle Sam. Although qualified dividends are now taxed from 15% to 20% (causing an increase in the amount of companies paying dividends), corporate America has not adjusted its cash-deployment strategy, on the whole.

2) Many of the largest foreign companies derive from or remain state-owned entities or regulated monopolies. These types of enterprises tend to grow slowly but steadily. As a result, they can reward their shareholders with high current income in lieu of significant share price appreciation.

3) The largest companies in emerging markets need to offer higher-than-average yields to attract foreign investors. They realize that the high growth potential they offer to investors is mitigated somewhat by the above-average volatility associated with emerging markets. So they offer high dividend payments to entice investors from developed countries, including deep-pocketed institutional investors.

The high yields also serve another purpose: providing protection against precipitous share-price declines. That’s because a lower share price results in a higher yield, assuming the dividend amount stays the same. At some point, this yield becomes enticing enough to attract investors back into the stock. As a result, solid dividend payments can help put a floor on a firm’s share price.

The bottom line is that investors looking for stable, high-yielding investments shouldn’t overlook the vast array of choices overseas.

More Gains Ahead

The themes described above aren’t new. In fact, I’ve kept a close watch on the international story for years. But I see more upside ahead in the international high-yield arena. After all, each and every one of the positive trends I just outlined should continue for years to come. We’re no longer in the early innings — particularly when it comes to the emerging-markets growth story — but we’re far from the end of the game.

I’m continuing to identify attractive high-yielding investments around the world that I think offer the potential for outsized gains over the next year or two. Even if the rosiest scenario doesn’t pan out and they don’t produce tremendous returns, we think each of these winners will generate excellent income without excessive volatility or severe downside risk. You should consider doing the same.

— Nathan Slaughter

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Source: Street Authority