A 5-Star Foreign Dividend Payer

Even though U.S. blue chips such as Procter & Gamble (NYSE: PG  ) have helped investors accumulate fortunes, the temptation to look abroad for the world's best dividend stocks is strong.

Many foreign stocks offer higher dividend yields than their U.S. counterparts. For example, the U.K.'s AstraZeneca (NYSE: AZN  ) doles out a gracious 5% dividend, while U.S.-based Wyeth (NYSE: WYE  ) pays a smaller 2.7%.

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 94,000 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.

Knowledge is power 
London-based holding company Pearson plc (NYSE: PSO  ) can trace its roots back to 1844, and it has a distinguished but diverse history. Interestingly, it began as a construction company during the Industrial Revolution, eventually morphing into a media conglomerate with financial news (The Financial Times and The Economist), book publishing (Penguin Group), and educational resources (Pearson Education).  

Pearson derives 75% of its sales from three segments: School, Higher Education, and Interactive Data Corporation (IDC). The largest of the three is School, which generates nearly two-thirds of its revenue from U.S. elementary and secondary schools. It is truly involved in all aspects of education, from publishing under recognizable brands like Scott Foresman and Prentice Hall, to providing software to help teachers and administration keep better records. This segment also produces, distributes, and scores standardized tests, which have become more prevalent under No Child Left Behind.

The Higher Education segment primarily publishes the sorts of overpriced textbooks that plague penniless college students everywhere. As you might imagine, it's a fairly profitable business, bringing in $320 million in pre-tax profits in 2007. Finally, the IDC segment provides financial data services akin to Bloomberg, Reuters, and Thomson Financial.

On the dividend front, Pearson looks mighty tasty, offering a 4.6% yield. With shares a full 26% off their 52-week highs, is now the time to pick up some shares of Pearson?

CAPS investors sure seem to think so, with 50 of the 53 players who have rated the stock believing it will outperform the S&P 500 going forward. Boomslang1982, for example, thinks that Pearson's grip on the education market will serve it well going forward, as he noted last July:

Great company, Great product, Employees love working there (have placed 5 there so far) and as the digital age makes its way into more schools, Pearson will be on the forefront. they also do some corporate and higher level education as well, but their focus is between the K-12. Also with the rise of home schooling and private, they will also be able to tap into those as well.

While Pearson does have a strong reputation in the growing field of education, significant earnings growth may be hard to come by. Analysts currently expect 9% annualized growth for Pearson over the next five years, bestowing it with an inconclusive PEG ratio of 1.5. On the other hand, since its education segments are primarily funded by state and local governments, the revenue streams should remain fairly stable, even in a down economy. In fact, education spending may actually pick up in a recession, since people will need more credentials to compete for fewer available jobs.

What do you think about Pearson -- or any stock, for that matter? Make your voice heard on Motley Fool CAPS today.


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