American blue chips have been the backbone of many investors' portfolios for the past century. In fact, Abbott Labs (NYSE: ABT ) , PepsiCo (NYSE: PEP ) , and Colgate-Palmolive (NYSE: CL ) were three of the best stocks from 1957 to 2003, according to research by Wharton professor Jeremy Siegel. For some, these very stocks helped build sizable fortunes.
Undoubtedly, domestic dividend payers will continue to play an important role in our portfolios into the 21st century.
But restricting yourself to just American blue chips going forward would be like entering a prize fight with one hand tied behind your back. To capitalize on the benefits of this century's best dividend-paying stocks, you need to look outside our borders.
Stamp your passport
Over the past decade -- especially the past five years -- the growth of the global economy has been remarkable. And the growth is only going to continue as more capital is invested abroad -- not only into emerging markets like China and India, but also into more developed markets like Greece and Ireland.
What's more, you're likely to find more companies paying higher dividends overseas. According to Bloomberg, "Dividends for the U.K.'s FTSE 100 index are also two-thirds more than those of the Dow Jones Industrial Average in the United States." Moreover, the NZX 50 index in New Zealand pays an average dividend yield of 6.17%.
It isn't even close
Foreign cash cows have been beating up their American counterparts since 2003. A screen on Capital IQ for companies capitalized above $1 billion with a current dividend yield greater than 2% illustrates the profound disparity quite nicely.
Fully 38% (72 of 189) of foreign dividend-paying stocks that trade on a U.S. exchange have more than doubled in the past five years. Included in this group are PetroChina (NYSE: PTR ) , up 805%, and Sasol (NYSE: SSL ) , up 373%.
On the other hand, only 17% (88 of 534) -- yes, 17% -- of U.S. companies that meet these criteria have more than doubled since January 2003. Some of the stocks on this list include Constellation Energy (NYSE: CEG ) , up 276%, and Reynolds American (NYSE: RAI ) , up 292%.
There are always added risks to consider (politics, currency, etc.) before investing abroad, but dividend-minded investors stateside will want to note two things in particular:
1. Dividend regularity. Or lack thereof. Foreign-company dividends may be larger, but they're often less regular in timing and amount. Companies abroad like to pay out a target percentage of earnings instead of a certain dollar value every year. Don't knock it: Freed from the pressure to lowball their payouts, these companies can pay you more over the long haul.
2. Dividend taxation. Foreign countries (the U.K. is an exception) will scalp your scratch by their going rate. Still, most countries you're likely to invest in have tax treaties with the United States (Google "IRS publication 901" for the complete list), meaning you can claim a credit for the tax withheld. Here's the rub: Because a credit offsets taxes you would have otherwise paid, it's smart to hold foreign stocks in a taxable account. In other words, skip the IRA if you're going abroad.
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This article was first published June 28, 2007. It has been updated.
Fool contributor Todd Wenning is split between Achtung Baby and The Joshua Tree as the best U2 album. He does not own shares of any company mentioned. Colgate-Palmolive is a Motley Fool Inside Value pick. Constellation Energy is an Income Investor pick. Sasol is an Income Investor and Global Gains recommendation. The Fool's disclosure policy pays dividends on the daily.