A common refrain here at the Fool is that if you want to find great investments, start by paying attention during your trips to the nearby shopping mall. That's because legendary investor Peter Lynch -- from whom many of us have drawn inspiration -- proved this to be a valuable use of spare time in his seminal work, One Up on Wall Street.
But Lynch was talking mostly about growth investments; rising dividend income wasn't really on his agenda. That's probably for the best, because when it comes to getting Mr. Market's best cash deals nowadays, staying local is sometimes the worst thing you can do.
Bubble, bubble, toil, and trouble
Despite the 2003 tax cut on qualified payouts, dividends have become less attractive lately. Why, you ask? Share prices for income-producing investments -- particularly real estate investment trusts (REITs) -- have enjoyed a remarkable run. Higher prices mean lower yields. This is, of course, a very profitable problem for the owners of these stocks. But for dividend stock pickers such as Motley Fool Income Investor chief Mathew Emmert, it makes life more difficult.
According to Mathew, yields on REITs averaged close to 7% two years ago. Now, he says, it's closer to 5% -- and it could get worse. Bloomberg just reported that for the week ending July 22, the Mortgage Bankers Association's index of loan applications fell to its lowest level since May. Shriveling demand for refinancing appears to be a key factor; the group's refinancing metrics were down 11.4%.
You'll pay me what?!
Yet lower yields on REITs are only part of the problem. Stocks have seen dips in the relative value of their payouts, as well. Data from researcher Value Line shows that the approximately 1,700 mid- to large-cap stocks it tracks in the Value Line Investment Survey offer an average yield of 1.6%. That's down more than 30% from what was offered at the 2002 market bottom.
It's also a miserable payout compared to what you can get from your local bank. I quickly checked available rates at my bank, and a 91-day commitment of $500 pays a current annual percentage yield of 2.75%. What happened to all the juicy yields? Did they pack up and leave? Well, actually, yes, they did.
Broadening your horizons
Some of the best yields can be found in stocks not based in the United States. You can invest in them through American Depositary Receipts, or ADRs. Mathew produced a wonderful primer on these kinds of investments for Income Investor subscribers. Take a look. (If you're not a subscriber and you want to test-drive the service on our dime for 30 days, click here.)
ADRs are shares issued in the United States by a trustee (such as a bank) on behalf of a foreign firm. They're not much different from stock in any U.S. company, and they typically trade on major exchanges such as the New York Stock Exchange or the Nasdaq. Indeed, owning the ADR of Income Investor pick Total SA (NYSE: TOT ) is equivalent in almost every way to owning stock in ExxonMobil (NYSE: XOM ) , except that Total is based in Paris and Exxon in Irving, Texas. And, ahem, Total pays roughly 1% more.
Outsource your portfolio
It's because of better yield opportunities that Mathew says he's looked overseas more often in recent months. In fact, three of his four picks from the March and April newsletters were foreign stocks, including consumer products giant Unilever (NYSE: UL ) -- whose 3.67% yield easily bests the 2.35% offered by rival Procter & Gamble (NYSE: PG ) -- and United Utilities (NYSE: UU ) of the United Kingdom -- which boasts a payout north of 7%, much better than 4.43% offered by Xcel Energy (NYSE: XEL ) , my local utility here in the Rockies.
Roughly 25% of the Income Investor portfolio is in foreign stocks or trusts. And that's proved to be a winning strategy. Mathew's picks have beaten the market by nearly 11% since the newsletter's inception.
An e-mergent market strategy
Do you really need more convincing? Fine. According to the Mergent Dividend Record, during the week of July 15, there were 228 new dividend declarations. Exactly 60 -- or 26% -- of those came from foreign firms. That ratio is roughly equal to Mathew's weighting of foreign issues in the Income Investor portfolio. Coincidence? I think not.
The Foolish bottom line here is simple: It's worth the time to take your stock research to foreign shores. Is it easy? No, but help is available. Take a risk-free 30-day trial to Income Investor and you'll get full access to all of Mathew's best ideas and to Foolish colleagues who will teach you how to find and invest in great global companies that offer big payouts. If you don't like what you see, you can back out with zero obligation. That's our Foolish guarantee. Click here to learn more.
Fool contributor Tim Beyers is a sucker for big yields and, yeah, he owns a couple of foreign stocks, none of which were mentioned in this story. You can find out what is in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.