Even though U.S. blue chips such as Altria (NYSE: MO) 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.-based cruise operator Carnival plc posts a healthy 4.1% dividend yield, while its main U.S. competitor, Royal Caribbean (NYSE: RCL), pays out just 1.9%.

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 companies (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 100,000 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.

Tata takes on the world
So far, 2008 has been an eventful year for Tata Motors (NYSE: TTM). In January, it unveiled the $2,500 Nano car, and just last month, Tata acquired Ford's (NYSE: F) Land Rover and Jaguar brands. Now if only the stock could follow suit; Tata shares are down 16% year to date.

But Tata's share decline isn't a surprise. Other Indian stocks like ICICI Bank (NYSE: IBN) and Rediff.com (Nasdaq: REDF) have also had a rough year, and the Bombay Stock Exchange itself is down 16% year to date. Concerns about higher inflation in the midst of rapid GDP growth have forced India's central bank to rein in money supply by forcing banks to increase their reserve requirements.

The tighter lending environment and higher raw materials costs contributed to a lackluster quarter for Tata Motors, but its stock retains its maximum five-star rating from the CAPS community. Let's see why.

Tata Motors

Toyota Motor (NYSE: TM)

Honda Motor

5-Year Analyst Estimated EPS Growth

12.0%

5.8%

3.6%

EBIDTA Margin (ttm)

13.1%

15.2%

12.7%

Price-to-Earnings (ttm)

11.2

9.2

8.3

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

Judging from these ratios, it appears that Tata Motors, while it may not be a dirt-cheap dream stock, is certainly keeping up with its Japanese competition, and analysts expect it to grow at a much faster rate than the others.

We don't yet know whether those lofty growth expectations will come to pass, of course, but CAPS investors think Tata has a great shot of reaching or even exceeding them. Of the 1,905 CAPS players who have rated the stock, fully 97% believe it will outperform the S&P 500. One such player is LowercaseGrant, who argued in February that Tata has the tremendous competitive advantage of innovative leadership in its corner:

The only thing keeping this stock from taking off right now is all the automotive giants playing "Johnny-Come-Lately" to all of Tata's ideas and markets. Tata keeps punching out the growth, even competing against the big dogs though. Good leadership with big eyes.

On the dividend front, Tata Motors offers a respectable yield of 2.3%, which it has traditionally paid out once a year in June, but the company's dividend history has a gap or two. According to the company's most recent 20-F filing, Tata has paid an uninterrupted dividend in each fiscal year since 1956, with the exception of 2001 and 2002, when it paid nothing in light of consecutive years of net losses.

At present, however, Tata appears to be generating more than enough earnings to cover dividend payments. Taking into account its need for massive capital spending each year, however, Tata's ability to generate consistent free cash flow is questionable. Investors would thus be wise to approach Tata's dividend payments as an "added bonus" to potential earnings growth and not as the main attraction. 

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