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Fund Spy

Dividend Investing Abroad

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 market, investors in the United States have been in hot pursuit of dividend-paying stocks. Funds such as  Vanguard Dividend Growth (VDIGX),  Federated Strategic Value Dividend (SVAAX), and Franklin Rising Dividends (FRDPX) have seen their asset bases burgeon over the past year through May, even as U.S. equity funds overall have lost $125 billion.

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  JPMorgan International Value (JIESX), observed that there has not been the same rush into foreign dividend-payers. "Compare  Royal Dutch Shell (RDS.A) to  Exxon Mobil (XOM)," Woort-Menker noted. Both global integrated oil-and-gas companies are reliable dividend stalwarts, but Morningstar currently calculates a projected yield of 4.8% for Royal Dutch Shell, as opposed to 2.9% for U.S.-based Exxon Mobil.

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  SPDR S&P International Dividend (DWX). This index exchange-traded fund boasts a dramatic 7.3% 12-month yield, one of the highest among foreign mutual funds and ETFs. The fund is also quite risky, however, as its yield screens don't always exclude distressed companies with plunging prices that push yield up.

Here is where active managers can shine. The managers of  Brandes Institutional International Equity (BIIEX) carefully cull stocks they believe are worth much more than their bargain-basement prices. The fund, which currently yields 5.5%, has held up well in downturns such as 2008 and 2011. But this is a strategy that demands patience from shareholders. For one thing, management's picks tend to cluster in particular countries and sectors, leading to outsized stakes in Japan and communications services, for example. And while the fund has excellent long-term returns, it can fall well behind in rallies.

 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.

Steady Dividend Strategies
The typical dividend-oriented investor is likely seeking regular income to lend stability to a portfolio. Woort-Menker's approach gets at that: While he is not a dividend investor per se, his preference for stocks with sustainable dividends is one reason for his fund's consistent, solid 10-year track record.

The funds below are centered on sensible dividend strategies. They may not boast yields as steep as those of their bolder deep-value peers, but they are likely to be easier on the nerves.

Allianz NFJ International Value (ANJIX)
April's Spy on domestic dividend-oriented funds featured  Allianz NFJ Dividend Value (PNEAX). Its foreign large-value sibling, which currently yields 2.8%, also deserves a mention. Ben Fischer leads the management team of both funds, focusing on dividend-paying stocks trading at a discount to book value. While this fund lost a bit more than its peers in 2008, it has not been unduly risky. And long term or short, its returns are among the best in the category.

American Funds International Growth & Income (IGAAX)
This foreign large-blend fund aims for a yield of 3.5% after expenses, and it is right on target. While the fund opened less than four years ago, its managers have long and successful track records at other American Funds. This one demonstrated the benefits of its dividend focus when it lost less than 96% of its peers in 2011. It might not keep pace in rallies, but this has shaped up to be the sort of steady performer investors expect from American Funds.

Tweedy, Browne Worldwide High Dividend Yield Value (TBHDX)
Name aside, this world-stock fund is not designed to maximize dividends, and its current yield is only 2%. However, its portfolio of high-quality, dividend-paying blue chips has done what it is intended to do: hold up beautifully in down markets. In fact, it managed a 4% gain in 2011, while its average peer lost nearly 8%.

Matthews Asia Dividend (MAPIX)
This fund, which currently yields 2.5%, focuses on companies with growing dividends--and has been one of the lowest-risk ways to invest in the diversified Asia-Pacific category. In fact, its three-year standard deviation of 14 would be moderate for any foreign fund. (The MSCI EAFE index, which focuses on developed markets, currently has a standard deviation of 20.) While this specialized portfolio won't serve as a core holding, even a conservative equity-income investor might be tempted to invest a bit in this regional player.

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