Even though U.S. blue chips such as Dow Chemical (NYSE:DOW) 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, Taiwan Semiconductor (NYSE:TSM) doles out a gracious 3.4% dividend, while U.S.-based MEMC Electronic Materials (NYSE:WFR) doesn't pay a dividend at all.
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 95,000 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.
In vino veritas?
Back in December, our Motley Fool Global Gains team visited the vineyards of Chilean winemaker Vina Concha y Toro (NYSE:VCO) after noticing the growth of the company's flagship Casillero del Diablo wine brand in the U.S. and Europe. They came away impressed with the operations, but they concluded that investors should buy the wine for now and wait for a better price before buying shares in Concha y Toro.
Since the Global Gains team's report on Dec. 5, Concha y Toro shares have declined 7%, a modest drop compared with U.S.-based Constellation Brands (NYSE:STZ), which has fallen 18% over the same period. On the other hand, the broader Chilean market is actually up (in U.S.-dollar terms) for the year, so does the recent dip put Concha y Toro into "buy" territory?
Before we get into that, let's review Concha y Toro's business. Yes, the company makes wine. That doesn't offer much of a competitive advantage, but making wine in Chile does. The 2,000-mile-long Chilean landmass stretches across 37 degrees of latitude, so Concha y Toro has a diversity of soil and climates in which to grow its grapes. Another competitive advantage is its experienced management team -- the CEO has been in charge since 1989, and the same CFO has been in place since 1992.
For 2007, sales increased 32% in (U.S. dollar terms), while net income more than doubled on the back of surging exports and lower production costs. What's more, these solid growth figures are in spite of the stronger Chilean peso, which makes Chilean exports more expensive. To combat these currency pressures, Concha y Toro uses British pounds and euros in more than half of its invoices.
On the dividend front, Concha y Toro offers a humble yield of less than 1%, but the company's steady cash flows, competitive advantages, and experienced management team should keep it prosperous for years to come.
OK, but is it the right time to buy? The small pocket of CAPS investors who follow Concha y Toro seem to think so, with 25 of the 28 players who have rated the stock believing it will outperform the S&P 500. One such player is gopirque, who has also seen the company's Chilean operations firsthand and had this to say in December:
I pass this winery every day when I'm in Chile. ... Some key things about Concho Y Toro is that the locals love it. Not because it is a cheap wine, but because it is very good ... world-class. ... People come from all over the world to tour the place. I did notice that debt had been inching upwards. This may be something to keep an eye on, however they did just replant several of their vineyards this fall (spring down there) and that may contribute to it.
Since gopirque's pitch, Concha y Toro has released 2007 earnings. Long-term debt has decreased slightly and is still nothing to worry about, and with an interest coverage ratio exceeding 10, the company has more than enough funds to cover its debt expenses. But with a current price-to-earnings ratio of around 20, Concha y Toro still isn't in deep value territory. Nevertheless, the stock deserves a place on your watch list, and the wine is worthy of a place on your dinner table.
What do you think about Concha y Toro -- or any stock, for that matter? Make your voice heard on Motley Fool CAPS today.
