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Whenever you invest, it's tempting to stick with the things you know the best. Often, though, the most familiar investments won't be the best ones you can make -- and if you dare to venture outside your comfort zone, you'll find rewards you never dreamed of.
One place where that's more true than ever is in trying to find high-yielding dividend stocks. For income-seeking investors who are willing to take on some risk, dividend stocks can help bridge the gap between how much income ultra-safe investments are paying now versus how much money you need to cover your living expenses. But even though you can find plenty of familiar household names that pay dividends, there's one place you won't want to ignore if you want big income: foreign dividend stocks.
Your search for income
Right now, if you're trying to figure out how to make an income from your investment portfolio, you're probably having a tough time. Certainly, traditional income-producing investments like bank CDs and high-quality short-term bonds aren't living up to their historical returns. All it takes is a look online or a call to your local branch to discover that with the rock-bottom rates most institutions are offering right now, it hardly seems to make sense to keep any of your money in the bank.
So to increase income, many investors are resorting to taking on higher risk. Some do so by buying longer-term bonds, which leaves them more vulnerable to the potential for higher interest rates in the future. Others have turned to less creditworthy issuers, which generally pay more interest but may also bear more risk of default than Treasuries or even the most solid corporate bond issuers.
Dividend stocks are certainly not risk-free, especially in comparison to FDIC-insured bank products. But they have an attractive feature that most bonds don't: they not only pay income but also have the capacity for substantial long-term growth.
You can't go home again
So if you want dividends, why not stick with U.S. blue-chips? Many dividend stocks are among the best-known companies in the world. After all, part of what makes a company able to pay substantial dividends consistently is a strong, successful business that's dependable regardless of economic conditions.
Unfortunately, even though many companies have increased their dividend payouts recently, they still don't yield anything close to what they did a year ago. That's because the stock market rally has lifted prices to such a huge extent that dividend yields haven't been able to keep up. For instance, PepsiCo (NYSE: PEP ) announced in March that it would increase its dividend by 7%. But even with the higher rate, its yield is now below 3% -- having fallen from 3.4% this time last year. Tupperware (NYSE: TUP ) is an even more dramatic case: this time last year, it yielded 3.5%. Now, its yield is down to just 2%, despite a dividend hike in the interim. It's not that either of these companies has performed badly -- quite the contrary. But when stock prices rise faster than dividend payouts, yields have to go down.
Among foreign stocks, on the other hand, you'll still see some impressive yields despite the rally. Canadian banks Bank of Nova Scotia (NYSE: BNS ) and Bank of Montreal (NYSE: BMO ) , for instance, have escaped much of the damage that their U.S. counterparts suffered, thanks to different mortgage practices and smaller declines in their housing markets. Both have yields in the 4% range despite having more than doubled from their March 2009 lows.
Even among red-hot emerging markets, where you might not expect to see big dividends from up-and-coming growth stories, you can uncover attractive dividend stocks. Colombia's Ecopetrol (NYSE: EC ) sports a trailing dividend yield of 5.9% and has exposure to oil fields in Brazil, Peru, and even the U.S. as well as its own domestic market. Despite ever-present concerns about violence in the country, Ecopetrol's growth prospects may be worth the risk. Philippine Long Distance (NYSE: PHI ) yields 6%, and as the country's leading landline and mobile telecom company, it gives investors a not-so-obvious way to invest in an emerging southeast Asian market.
What to watch out for
Buying foreign dividend stocks is easy, thanks to ADRs that trade on U.S. exchanges. But there are a couple things to be aware of. First, many foreign companies don't try to maintain a constant level of dividend payouts, so you may see big rises or falls from quarter to quarter.
Also, you'll want to verify whether your dividend qualifies for tax-favored treatment with a 15% maximum rate. Some payouts from foreign companies don't count as qualified dividends -- and to add insult to injury, you may also end up with a foreign tax hit as well.
All told, though, it's worth taking a closer look at foreign dividend stocks. The opportunities there may surprise you.