U.S. dividend stocks continue to sport relatively low yields compared with other assets, especially as bond yields climb amid the Federal Reserve’s rate-hike campaign. But for income investors still interested in dividend income, there is an alternative: international stocks, many of which have attractive yields.
The MSCI Europe index was recently yielding 3.4%, Japan’s Nikkei 225 index was at 2%, and the MSCI Emerging Markets index was at 3.1%. Those compare with a yield of 1.6% for the S&P 500.
“Outside...
U.S. dividend stocks continue to sport relatively low yields compared with other assets, especially as bond yields climb amid the Federal Reserve’s rate-hike campaign. But for income investors still interested in dividend income, there is an alternative: international stocks, many of which have attractive yields.
The MSCI Europe index was recently yielding 3.4%, Japan’s Nikkei 225 index was at 2%, and the MSCI Emerging Markets index was at 3.1%. Those compare with a yield of 1.6% for the S&P 500.
“Outside the U.S., there’s more of a culture of returning capital to shareholders through dividends rather than buybacks,” says Julian McManus, a portfolio manager at Janus Henderson Investors. He adds that he is “starting to see buybacks creep in” among companies overseas, though they’re not nearly as prevalent as they are among U.S. firms.
Overseas Markets Data
Beyond international stocks’ attractive yields, there is an argument that this is a good time for overseas companies, which offer diversification and other benefits. The international dividend story also has a valuation element.
McManus points out that earnings yields—that is, the earnings of companies as a percentage of their stock prices—are generally lower in the U.S. than they are in Europe, Japan, and other regions. He puts it at roughly 6% for U.S. stocks overall, compared with 8% and higher in Europe and the United Kingdom. The higher the yield, the lower the valuation.
“Earnings outside of the U.S. are just valued at a lower multiple,” says McManus. “And then it’s a question of how much of those earnings are going to get paid out as dividends. There’s obviously a proven track record among managements in Europe to be willing to pay a greater proportion [of earnings] out.”
For U.S. investors interested in overseas income, one thing to keep in mind is that most countries impose a withholding tax on dividends paid to nonresidents. However, those withholding taxes, in many cases, can be credited against the U.S. shareholder’s U.S. tax liability, according to Robert Willens, a New York–based accounting and tax expert.
There are some other key differences between U.S. and international stock markets. “Index composition, sectorwise, in international markets is far more cyclical than in the U.S.,” says Shane Duffy, a London-based portfolio manager for J.P. Morgan Asset Management.
For example, materials and energy recently accounted for around 13.5% of the MSCI Europe index, compared with about 7% for the U.S. index. On the flip side, information technology was 27.3% of the U.S. index, compared less than 7% for the European counterpart. The largest weighting for that index was healthcare, at nearly 17%.
Another risk international dividends pose is that they can be more apt to get cut in economic downturns.
Alexis Deladerrière, head of international developed markets equity at Goldman Sachs Asset Management, attributes the higher risk of dividend cuts in Europe to several factors, including overall lower margins and more leverage for those companies compared with U.S. firms. European stocks also sport higher dividend-payout ratios, owing in part to their preference for dividends over buybacks.
“All of that combined means that you are potentially more at risk for dividend cuts in Europe than in the U.S. in the case of a downturn,” Deladerrière says.
In some ways, U.S. investors face a trade-off when it comes to international dividends: higher yields with higher risk. In contrast, says Duffy, “the U.S. income stream of dividends has been more moderate, but has probably been more stable.”
During the early stages of the pandemic in 2020 and beyond, many international stock dividends were cut or suspended. In 2020, for example, European dividends, excluding the U.K., plunged 32% in U.S. dollars from the previous year, according to the Janus Henderson Dividend Index.
But North American payouts, mostly from U.S. companies, rose by nearly 3% that year, testament to their overall stability.
Japanese dividends dropped by 5% in 2020, a relatively small decline compared with other regions like the U.K., which fell by 40%.
Duffy says that Japanese companies are managing their payouts more effectively than they used to. “Over the last 10 years,” he adds, companies there have been “more focused on distributions.”
The Nikkei 225 index’s yield of 2% was well above the S&P 500’s 1.6% level, but still far below some indexes in Europe. Emerging market dividends overall are somewhere in the middle of the pack, with the MSCI index for that region recently yielding 3.1%.
Deladerrière, whose duties include helping to manage the $304 million Goldman Sachs International Equity Income fund (ticker: GSAKX), says he’s finding good yield opportunities in sectors such as infrastructure, real estate, and utilities. The fund’s holdings include Iberdrola (IBE.Spain), a large Spanish utility whose stock recently yielded 4.25%. Another holding is Klépierre (LI.France), a real estate investment trust that owns and operates shopping centers in Europe, with a yield of about 8%.
The fund also holds a stake in Vinci (DG.France), which yields about 3.6%. It owns toll roads, which can regularly raise their fees to help offset inflation. “Toll roads are great asset because [they have] very long-term contracts, with inflation protection,” says Deladerrière. Those contracts provide “very good downside protection in a downturn.”
The prospect of an economic downturn looms large in Europe, partly owing to the war in Ukraine.
Still, Duffy of J.P. Morgan points out that corporate balance sheets in Europe are in pretty good shape. “There is room for the dividends to be less impacted in this early downturn than [during] the Covid-related downturn,” he says.
Write to Lawrence C. Strauss at lawrence.strauss@barrons.com