In bull markets, many investors may overlook the importance of dividends. But when markets become more tentative or start to slump, dividends can look a lot more attractive.

Now a new report this week from Standard & Poor's is suggesting that there might be even better gains to be had from dividends paid by firms outside the U.S.

According to S&P mutual funds analyst Dylan Cathers, 40% of the gain in international shares during 2010 came from dividend payments. Cathers also notes that the average dividend yield for the 12-month period ended May 31 on an international large-cap core fund was 3.1%, compared to just 2.2% for the comparable average U.S. domestic large-cap core funds.

There was an even greater difference in the value category, he says, with the average dividend yield for international large-cap value funds for 12 months through May 31 coming in at 3.4%, versus an average dividend yield of just 2.4% for U.S. domestic large-cap value funds.

Cathers says his research suggests that besides being “a better place to search for dividends,” international funds will help investors to diversify their portfolios beyond just domestic holdings.

He offers three suggestions of five-star-rated international mutual funds that have records of providing above-average dividend yields:

-- The Templeton Foreign Fund (TEMFX): With a dividend yield of 4.0%, which Cathers says ranks it “well above the large-cap core peer average of 3.1%," this fund has “sharply outperformed peers” over trailing one-, three- and five-year periods.

-- Homestead Funds Inc.'s International Value Fund (HISIX): With a 3.7% dividend yield, well above the “already high” international large-cap value peer average of 3.4%, this fund’s three-year annualized return through June 17 was negative 2.4%, compared to a peer average loss for the period of 6.2%.

-- American Beacon International Equity Fund (AAIAX): Sports a dividend yield of 3.6 so far this year, well above the large-cap core peer group and has outperformed the group on both a trailing one- and three-year basis. 

Cather says that given these performance figures, “it is easy to see that U.S.-focused investors seeking income may be closing themselves off to a world of possibilities.”


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