To improve the income profile of their portfolios, more investors are willing to consider foreign equities and exchange-traded funds of such stocks that use a dividend screen, but with foreign indexes, that screen is not always the same.
“Dividends in Europe are much more important than they are in the U.S., so you can get some nice dividend yields,” says Allan Nichols, senior equity analyst at Morningstar. Often, however, what you can’t get from foreign companies is a long history of dividend increases.
While indexes in the U.S. that screen companies based on the number of consecutive years of dividend increases usually have a minimum requirement of 10 or even 20 years, comparable foreign benchmarks sometimes require as few as five years of payment hikes.
Nichols says that’s understandable because many overseas companies in industries known for increasingly generous payments were government owned until fairly recently. He cites the telecom industry as an example.
Back in 2006, if you were looking for an ETF that focused on foreign dividend-paying stocks, you had a choice of one. Today, there are more than 20, including single-country dividend portfolios.
But an advisor has to choose carefully, since these products have significant differences. Many have no requirement for a minimum number of annual dividend increases, a screen that potentially can reduce some of the volatility of the portfolio. “It means that companies have a little more staying power if they are able to pay a growing dividend,” says Alec Young, global equity strategist at S&P Capital IQ.