When I was with a Wall Street firm it was very common for stockbrokers to make fun of investors focused on income. In the old days many bonds came with coupons that investors clipped and then cashed. Nothing was worse than to be labeled a “coupon clipper”
But with bond interest rates at record lows and concern over rising inflation, investors are hungry for higher yields and have suddenly become keenly interested in collecting dividends.
It’s about time. Dividend-paying stocks provide a consistent stream of income for their shareholders with the bonus of lower risk compared to high growth stocks. What many don’t know is that numerous studies show that, over time, dividend-paying stocks outperform their go-go growth stock brothers. Dividends also better align management with the interest of minority shareholders and can help identify healthy companies with strong cash flows.
A word of caution though – nothing can tank a high-dividend stock faster than a cut in its dividend. So you want entrenched well known consumer brands plus a strong record of management protecting and growing a company’s dividend to go along with above-average current dividend yield.
Why & How to Go Global
Don’t forget to look overseas in putting together your dividend-rich portfolio.
Take Asia for example. Last year, companies in the MSCI Asia-Pacific index paid out almost as many dividends as those in the S&P 500. And according to Matthews’ Funds, from 2002-2009, Asian companies grew dividends at a compound annual growth rate of 18%, compared to 10% for the S&P 500. Japan, China, Australia, Taiwan and Hong Kong are the biggest dividend payers in the region
Europe also offers some good opportunities. For example, British American Tobacco (BTI) has a 4.2% dividend yield and a 17% annual dividend growth rate over the past 5 years.
In addition, exchange-traded funds (ETFs) have made putting together a low cost basket of dividend companies a snap. Here is a global triple-play that will supersize your dividends.
First, look at the brand new Global X Super Dividend ETF (NYSE: SDIV) which tracks the performance of 100 equally weighted companies that rank among the highest dividend-yielding equity securities in the world.
SDIV provides good diversification with exposure to REITs (22%); consumer discretionary stocks (16%); telecommunications (16%); financial services (10%); utilities (8%); banks (5%); consumer staples (5%); energy (5%); industrials (5%); insurance (3%); technology (3%); and health care (2%).
About 32% of the companies in the basket are based in the U.S., 24% in Australia, 10% in Great Britain, 6% in Canada and 4% in Singapore, among others.
Second, add to the mix one of my long-time favorite ETFs, the PowerShares International Dividend Achievers (PID). To get into this exclusive basket, companies have to have a record of increasing dividends for five consecutive years. The United Kingdom and Canada make up 50% of its holdings with the US at only 6%.
Finally to get more Asia & emerging market exposure, add a dash of WisdomTree’s Emerging Market Equity Income ETF(DEM) DEM has 20% exposure to Taiwan as well as 20% to Brazil. Telecom companies make up a majority of the companies in the basket and you can expect it to distribute dividend income in the area of 5% annually.
With this global triple play, your stock portfolio will get a welcome shot of income.