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By Josh Peters, CFA | 02-03-2015 01:00 PM

Can You Rake In Higher Dividend Yields Abroad?

Policy and valuation factors have contributed to higher dividend yields on overseas investments, but currency exposure and withholding taxes could take a bite out of your total return, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Many investors looking for higher yields have been going abroad. I'm here with Josh Peters--he's editor of Morningstar DividendInvestor newsletter and also director of equity-income strategy--to see what some of the pros and cons are of investing abroad. Josh, thanks for joining me today.

Josh Peters: Good to be here, Jeremy.

Glaser: Why are investors looking overseas for more yield? Generally speaking, do European or Asian companies pay higher dividend yields than their U.S. counterparts?

Peters: Well, there are two components to it that give you higher dividend yields [overseas]. First is that payout policies are more geared toward dividends in other countries while here in the United States, companies in the S&P 500 have actually spent more on share repurchases than on dividends lately. So, that's one piece of the puzzle. Another is that valuations are lower. So, for the same payout ratio, a stock or a country's whole stock market that trades at a lower P/E is going to give you a higher dividend yield. For those reasons, yes--if you are using as your benchmark the S&P 500, yielding about 2%, which is pretty much the yield we've been stuck with here over the last couple of years (on average, more like the last 15 years). Yes, you can get some higher dividend yields in other countries, but there are some trade-offs associated with that.

Glaser: Let's look at some of those trade-offs. What are some of the concerns about doing this? Why wouldn't you move your entire dividend portfolio into higher-yielding geographies?

Peters: I think a big, practical reason is that most people who are looking for a lot of income are typically in portfolio-withdrawal mode. Perhaps they are retired or they have other financial obligations to meet. If they live in the United States--if they are domestic investors--then there is an advantage to having your dividends paid in dollars so that you can meet those dollar-based liabilities and expenditures that you have to meet.

Now, this isn't something that people have talked about a whole lot up until the last couple of months, and then all of a sudden, I start getting emails from DividendInvestor subscribers wanting to know why Unilever (UL) cut its dividend. Well, Unilever didn't cut its dividend. In fact, it paid the same EUR 0.285 for the first quarter of 2015 as it did in the previous quarter and the quarter before that. What's changed is that the euro has dropped from $1.35 to maybe around $1.15 or $1.10. And with that, the dollar income that a U.S. shareholder receives from Unilever has gone down by the identical percentage. So, it's meant a loss of income even though the company itself, in its home currency, is doing fine and continuing to maintain that dividend. So, that's one constraint.

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