These Foreign Dividends Won't Freak You Out

One of the most attractive things that investors like about dividend stocks is their dependability. Quarter in and quarter out, most dividend stocks in the U.S. pay the same predictable amount every three months. Occasionally, you'll even get a nice boost to your payout -- and in most cases, you can expect that raise to be permanent.

But if you venture abroad for great dividend stocks, you'll quickly notice something: You often won't get those dependable dividend amounts. Not only can you not depend on dividends staying stable from quarter to quarter; you may not even get a dividend every quarter. If you're not prepared for the way a certain company pays its dividends, you might be in for an unpleasant surprise.

A different point of view
In the U.S., investors looking for strong dividend stocks tend to focus on three things. A stock's dividend yield is the most important factor, telling you what you can expect if you invest in shares today.

But almost as important as yield are two other related factors: dividend history and dividend growth. U.S. investors prefer to see companies that have a long record of never cutting their dividends. Even better, stocks that manage to deliver regular dividend increases to their shareholders enjoy enhanced reputations, especially once streaks of dividend growth pass the quarter-century mark.

In contrast, companies in other countries don't always pursue those same goals. You may find different practices, including the following:

  • Payouts based on earnings
    If a company's financial performance changes significantly, then the amount it pays in dividends can vary widely from year to year.
  • Payouts other than quarterly
    You're more likely to see annual, semi-annual, or irregular dividend payments from foreign companies.

In addition, even if a company keeps its dividend stable, currency exchange rates can affect how much those dividends are worth in U.S. dollar terms.

As a result, it's easy to get confused when researching foreign dividend stocks. Quote services that are used to calculating yields based on stable quarterly payouts can seriously misstate the actual dividend yield on foreign stocks with irregular dividend histories. For instance, National Grid (NYSE: NGG  ) shows up on Yahoo! Finance with a forward yield of 7.7%, but its trailing yield is a more modest (though still impressive) 6%.

Getting regular
Fortunately, some foreign dividend stocks deliver the dividend growth that U.S. investors want to see. For instance, the International Dividend Achievers index identifies international stocks and ADRs that have increased their annual dividend for five or more consecutive years. They don't all make regular quarterly payments, but they each have demonstrated an ability to keep their overall payouts on the rise -- and with the carnage of the financial crisis firmly within the past five years, that's saying something.

Currently, you'll find a good variety of stocks in the index. Pharma stocks GlaxoSmithKline (NYSE: GSK  ) and AstraZeneca (NYSE: AZN  ) face the same challenges as their U.S. counterparts in maintaining sales and developing new drugs, but they have attractive yields based on their past successes. Teekay LNG Partners (NYSE: TGP  ) has turned transporting crude and other energy products into consistent payouts for shareholders. And just as you do at home, you'll also find telecom stocks well-represented, with Telefonica (NYSE: TEF  ) , Philippine Long Distance (NYSE: PHI  ) , and Partner Communications (Nasdaq: PTNR  ) all making the list.

Make it work for you
Just because foreign dividend stocks don't behave the same way U.S. stocks do doesn't mean you should give up on them entirely. Indeed, foreign stocks often are more attractive dividend payers than U.S. competitors in the same industry. As long as you can stand the unpredictable timing and amounts of cash flow you'll get, then foreign companies with healthy payouts deserve a place in your dividend stock portfolio.

The best dividend portfolio includes stocks from around the world. Check out the Fool's free special report on 13 great dividend stocks and see which stocks you should add to your own holdings.

Fool contributor Dan Caplinger now has "Freakhouse" stuck in his head. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of GlaxoSmithKline and Telefonica. Motley Fool newsletter services have recommended buying shares of Partner Communications, GlaxoSmithKline, National Grid, and Philippine Long Distance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy works around the world.


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 12, 2011, at 5:27 PM, Tregarde wrote:

    One noteworthy item about foreign dividend stocks is foreign tax withholding.

    For example, PHI currently withholds 25% for Philippine taxes, which a U.S. investor may or may not be able to reclaim on the tax return. In any case, it reduces the amount of cash received for those investors focus on current income.

  • Report this Comment On July 13, 2011, at 8:08 AM, dunkmaster wrote:

    why would that 25% not be eligible for the forgien tax credit?

  • Report this Comment On July 13, 2011, at 9:51 AM, ZuluFool1 wrote:

    I believe if you hold that stock in an IRA, you would not be able to claim the tax credit

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