Even though U.S. blue chips such as Kellogg (NYSE: K) 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 do. For example, U.K. hotelier InterContinental Hotels Group (operator of the Holiday Inn and Crowne Plaza chains) doles out a 3.5% forward dividend, versus the Westin's and Sheraton's U.S.-based parent, Starwood Hotels & Resorts (NYSE: HOT), which pays just 1.8%.

Not all dividend stocks are 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 97,000 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.

Pipe dreams
Over the past six months, CAPS investors have changed their opinion of energy infrastructure company TransCanada (NYSE: TRP), raising it from a 3-star rating to the highest 5-star rating.

TransCanada owns and operates pipelines that transport oil and natural gas across North America, as well as running a portfolio of nuclear, natural gas, coal, hydroelectric, and wind power plants. Over the past year, it has been on a spending spree, making acquisitions to solidify and diversify its holdings.

At the end of last month, it paid National Grid (NYSE: NGG) $2.8 billion for a 2,480-megawatt gas-fired power plant in New York. The market thought TransCanada might have paid too much for its prize, so the shares dropped 7% immediately after the announcement. TransCanada management, however, has already recognized that the Ravenswood acquisition will dilute earnings for the first two years, and after that will add to earnings. This sort of market shortsightedness is always welcome news to long-term investors, who can pick up more shares at a discounted price.

But have TransCanada shares fallen enough to present a buying opportunity for new investors? To shed some light on that issue, let's stack the company up against two of its competitors in the pipeline business.



Enbridge (NYSE: ENB)

Price-to-Tangible Book




Return on Equity (ttm)








Price-to-Earnings (ttm)




Data provided by Capital IQ, a division of Standard & Poor's; ttm = trailing 12 months; TEV = total enterprise value.

Judging from these ratios, it looks like TransCanada could be worth some extra research.

The small pocket of CAPS investors who follow the company sure seem to think so, with 131 of 137 players who have rated the stock believing it will outperform the S&P 500. One such player is letawellman, who thinks that geopolitical winds are also at TransCanada's back

[TransCanada] has received new leases for their oil and natural gas lines. Getting oil from Canada to the USA will be of top concern among crude producers. [TransCanada] is poised to fill this need, and everyone is looking for ways to get oil from somewhere OTHER than OPEC.

On the dividend front, TransCanada offers a solid yield of 3.9%, but don't blindly expect steady dividend growth. According to the company's most recent filing, it does not have a formal dividend payout policy, and provisions of debt indentures and credit arrangements may restrict its ability to make dividend payments. In other words, if profits get pinched, lenders could force TransCanada to ensure their loan repayments before it gives common-share holders quarterly cash.

At present, however, management doesn't expect those provisions to hamper dividend growth, and from a financial standpoint, the company generates enough free cash flow and profits to at least maintain its current dividend payout.

What do you think about TransCanada -- or any of the other companies mentioned, for that matter? Make your voice heard on Motley Fool CAPS today. 

National Grid and ONEOK are Motley Fool Income Investor picks. InterContinental Hotels is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletters for free for 30 days.

Fool contributor Todd Wenning will take on anyone in NHL 1994 for Sega Genesis. He does not own shares of any company mentioned. The Fool's disclosure policy once had to fill a brandy glass with brown M&Ms, or Ozzy wouldn't go on stage that night.