As investors pile into U.S. dividend-oriented stock funds, it may be time to look farther afield.
Whether to increase income as interest rates scrape bottom, or to reduce
equity risk in a volatile markt, investors in the United States have been in
hot pursuit of dividend-paying stocks. Funds such as
Granted, noteworthy domestic dividend-oriented funds are still finding opportunities, and April 3's Fund Spy highlights several such funds. There are more plentiful opportunities abroad, however.
In a recent Morningstar interview, Gerd Woort-Menker, longtime manager of
That's not an isolated example. Even the bluest chips have been embroiled in the European crisis, and plunging stock prices have boosted yields abroad. Indeed, the average foreign large-cap value fund has a 12-month-yield of 2.9% as of May 31, compared with 1.4% for the typical U.S. large-value fund.
Now may be the time for dividend-oriented fund investors to look to the horizon. Those doing so in taxable accounts should be aware of two quirks detailed in this ETF Specialist. First, many countries require taxes to be withheld before dividends are distributed, and U.S. investors can claim a deduction or credit for those foreign taxes paid. Second, thanks to tax treaties, many foreign dividends are taxed at the qualified dividend rate currently in effect until the end of 2012, but others are treated as ordinary income.
High Yields Spell Opportunity, Not Safety
Another caveat: Yield is not the end of the story. Take
Here is where active managers can shine. The managers of
Causeway International Value CIVIX is a similar story: Its 3.5% yield is a reflection of an almost contrarian stock-picking process. Sarah Ketterer and her team insist on clean balance sheets and seek companies that are either paying dividends or buying back stock. However, they want to buy low. That meant adding economically sensitive materials and industrials stocks during the economic crisis in 2008 and early 2009. While the fund's long-term returns are outstanding, shareholders have had to hold on through some bumpy patches.