Going abroad for higher dividend yields

Wed Mar 13, 2013 6:23pm EDT
 
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By Conrad de Aenlle

LONG BEACH, Calif., March 13 (Reuters) - Foreign stocks are coveted for the superior growth and value they can offer. Investors have turned to them lately for higher income, too.

Dividend yields can be a percentage point or two greater in overseas markets, making them especially fertile destinations at a time when income-hungry investors need every percentage point they can get.

The Standard & Poor's 500-Stock Index yields about 2 percent, near 60-year lows. Yet if investors venture farther afield, they will achieve yields of about 3 percent on the MSCI Europe Index and 4 percent on the MSCI Pacific ex-Japan Index.

Money managers find the higher yields particularly appealing because they often go hand in hand with greater financial strength and more reasonable prices. The recent outperformance of U.S. stocks helps to account both for their comparatively meager yields and expensive valuations, said Alex Robins, an international equity manager at J.P. Morgan Asset Management.

"There are a lot of parallels" between foreign and American high-yield stocks, Robins said. "(Companies) have huge amounts of cash on their balance sheets, strong profitability and low debt relative to their history. The big difference is that companies outside the U.S. are more attractively valued."

The yield discrepancy is easy to spot when comparing multinational companies within the same industry, said Alex Crooke, director of global equity income at Henderson Global Investors. Despite having a similar business profile, a foreign company is likely to yield more than an American one, Robins said, so "investors get higher yields without taking inherently more risk."

Crooke suggests various reasons for the discrepancy. The dominant investors overseas - the ones local companies must please - tend to be corporate and public pension funds that "demand bond-like returns" and place a greater emphasis on income. Mutual funds and 401(k) plans that dominate in the United States focus more on capital growth.   Continued...