Many foreign stocks offer higher dividend yields than their U.S. counterparts do. For example, the U.K.'s GlaxoSmithKline (NYSE: GSK ) doles out a gracious 6% dividend, while U.S.-based Eli Lilly (NYSE: LLY ) pays a smaller -- though still respectable -- 3.8%.
Not all created equal
Despite the tremendous opportunities available to generate income from companies abroad, stateside investors should know two things before stamping their passports:
- Dividend regularity -- or lack thereof. Foreign companies' dividends can be larger than U.S. companies', but they're often less regular in timing and amount. Companies abroad like to pay a target percentage of earnings, instead of a certain cash 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.
- Dividend taxation. Foreign countries (except for those in the U.K.) can scalp you at their going rate. Still, most countries in which you're likely to invest have tax treaties with the United States, so you can claim a credit for the tax withheld. But 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.
Of course, not all foreign dividend stocks are created equal. So each week, we highlight a five-star foreign dividend payer with the assistance of the 92,000 investors participating in Motley Fool CAPS, the Fool's free investing community. After all, having a second (or 300th!) pair of eyes can help you separate the wheat from the chaff.
The tide turns on Golar
Bermuda-based Golar LNG (Nasdaq: GLNG ) is in the business of shipping liquefied natural gas (LNG) across the globe, and with natural gas prices recently topping $10 per million British thermal units for the first time since December 2005, there is certainly demand for its services.
But you wouldn't know that natural gas prices were riding high from looking at Golar's recent stock performance -- Golar stock currently sits 35% off its 52-week high. Part of the reason for this slump could be that shipping stocks in general, including DryShips (Nasdaq: DRYS ) and Teekay (NYSE: TK ) , have fallen over the past six months as concerns about a U.S. recession have increased.
On the other hand, Golar's fourth-quarter report didn't help matters -- it led to downgrades from Jefferies and Friedman Billings Ramsey on Feb. 27.
So what necessitated those downgrades? For one, Golar's quarter wasn't as strong as its comparable quarter in 2006, with revenue down approximately 15% year over year and its dividend cut in half to $0.25 per share. Moreover, net income declined for the year, after you strip out the company's $73.5 million gain from the sale of its Korea Line in the second quarter. Finally, the company's 2008 outlook wasn't as bright as investors had hoped.
The reduced dividend definitely drove some income-thirsty investors away, yet a volatile dividend from Golar shouldn't be surprising. According to the company's dividend policy, "The Board's objective is to pay a regular dividend. The level of dividend will be guided by current earnings, market prospects, capital expenditure requirements, and investments."
But none of this has stopped CAPS investors from touting the stock. In fact, they continue to be overwhelmingly bullish on the shares, with 294 of the 296 players who have rated the stock believing it will outperform the S&P 500.
The tide seems to be turning slightly since the fourth-quarter report, however. Some players, such as Tastylunch, have grown more skeptical of the opportunity.
Consider Tastylunch's original investment thesis in December:
Golar has a Humongous dividend that only gets more attractive as interest rates get cut. A Recent new share issue took some of the price out of the stock, however the money gained form the sale was put to good use buying [LNG carrier] Granatina. ... Income investors will like this play which has no exposure to the sub-prime mess.
Now, fast-forward to March, when Tastylunch writes:
A lot has changed since I made my pitch. ... Mainly I like Golar's dividend but that's significantly less attractive now since they heavily diluted it to buy the Granatina. I'm extending my timeline on this, I think this stock will do pretty well in 2009 ... might be a little rough here in 2008 especially if LNG prices turn against them. We shall see.
I think investors should heed Tastylunch's words and approach this stock with some skepticism. Income-minded investors hoping for a steady, growing dividend should stay away from this one.