American blue chips have been the backbone of many investors' portfolios for the past century. In fact, Coca-Cola
Though some domestic large caps have slashed their dividends in the past year, those with strong balance sheets and plenty of free cash flow to support their payouts will continue to play an important role in our portfolios into the 21st century.
But restricting yourself to just American blue chips now would be like entering a prizefight with one hand tied behind your back. To capitalize on the benefits of this century's best dividend-paying stocks, you need to look outside our borders.
Stamp your passport
Over the past decade -- especially the past six years or so -- it has become clear that the global economy has become more closely integrated than at any other point in history. Today, capital can find its way to just about any country with relative ease, allowing investors to search the globe for the best available returns.
What's more, you're likely to find more companies paying higher dividends abroad. The average dividend yield of the U.K.'s FTSE 100, for example, is 3.4% -- a good bit higher than the S&P 500's 2%. Moreover, the NZX 50 index in New Zealand pays more than twice as much as the S&P, with an average dividend yield of about 4.2%.
It isn't even close
Foreign cash cows have been beating up their American counterparts since 2004. A screen on Capital IQ for companies capitalized at greater than $1 billion, with a current dividend yield exceeding 2%, illustrates the profound disparity quite nicely.
Despite the global market downturn, which in many countries has been far worse than in the U.S., about 32% (41 of 129) of foreign dividend-paying stocks that trade on a U.S. exchange have more than doubled in the past six years. Included in this group are Sasol
On the other hand, only 14% (52 of 361) of U.S. companies that meet these criteria have more than doubled since February 2004. Some of the select stocks on this list include Chevron
There are always added risks to consider (politics, currency, etc.) before investing abroad, but dividend-minded investors stateside will want to note two things in particular:
1. Dividend regularity. Or lack thereof. Foreign-company dividends may be larger, but they're often less regular in timing and amount. Companies abroad like to pay out a target percentage of earnings instead of a certain dollar 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.
2. Dividend taxation. Foreign countries (the U.K. is an exception) will scalp your scratch by their going rate. Still, most countries in which you're likely to invest have tax treaties with the United States (search for "IRS publication 901" using Google for the complete list), meaning you can claim a credit for the tax withheld. 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.
Feeling overwhelmed, but don't want to pass up the double benefit of foreign growth potential and dividends? I urge you to consider a free examination of the Motley Fool Income Investor service, and to join us in our quest to find the world's best dividend payers.
The Income Investor service has more than 20 active international recommendations at present, plus a stable of domestic dividend divas. Moreover, 80% of its picks continue to outperform the S&P 500 while posting an average dividend yield of 4.3%. You can get your free guest pass through this link.
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This article was first published June 28, 2007. It has been updated.
Fool analyst Todd Wenning is split on whether Achtung Baby or The Joshua Tree is the best U2 album. He owns no shares of any company mentioned. Coca-Cola is a Motley Fool Inside Value selection. Sasol is a Global Gains pick. Coca-Cola and Sasol are Income Investor recommendations. The Fool's disclosure policy pays dividends on the daily.