Even though U.S. blue chips such as 3M (NYSE: MMM) 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 BP doles out a gracious 5.3% dividend, while U.S.-based ConocoPhillips (NYSE: COP) pays only 2.4%.

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 89,000 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.

Calling long distance
Spain-based telecommunications giant Telefonica (NYSE: TEF) has already connected most of the Spanish-speaking world, Europe, and even Morocco with both mobile and landline phones. Now it has its sights set on the Far East.

In January, Telefonica upped its existing stake in broadband and fixed-line operator China Netcom (NYSE: CN) from 5% to 7.2%. As China's telecom restructuring effort gets under way, Telefonica's betting that it can provide technology for China Netcom's move into wireless communications. There's huge potential here, but there are also notable risks -- particularly any hiccup in China's telecom restructuring plan.

The ability to cast such a wide geographical net is one of Telefonica's competitive advantages over American players like Verizon (NYSE: VZ) and AT&T (NYSE: T). In fact, Telefonica does less than 40% of its sales in Spain, while Verizon does 97% of its business in the U.S.

On the dividend front, the stock yields 5.6% and shows signs of continued growth and sustainability. According to Telefonica's 2007 annual report, the company plans to maintain its one-euro-per-share dividend policy through the first half of 2009. More importantly, the company recently announced a 100-million-share buyback program, which will also return value to shareholders by reducing the number of shares outstanding.

How will Telefonica perform going forward? CAPS investors are overwhelmingly bullish on the shares, with 242 of the 252 players who have rated the stock believing it will outperform the S&P 500. Most bulls tend to concur with player xfranco4bcn's recent investment thesis:

Telefonica is improving profitability in all areas of business (bandwidth connection, mobile and fixed communications), once it has divested its non-telecom operations (contents, media). Beginning 2008 they presented an internal reorganization to merge its mobile and fixed salesforce in Spain and Latin America which prepares them to continue their positive trend even if a recession is confirmed. Additionally, they are partnering with China Netcom to develop the Chinese market opportunity.

In this Fool's opinion, Telefonica is worth additional research. The company's extensive presence in Latin America, Europe, Northern Africa, and now China should continue to pay dividends (pun intended) going forward.