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Going global pays dividends

About 75% of the world's dividends come from outside the U.S. but the search for dividend yield by advisers and investors is largely limited to U.S. companies.

Jun 24, 2014 @ 12:01 am

By Alex Crooke

Life expectancies are getting longer and for many, saving for retirement is becoming increasingly difficult. In this yield-starved, low-interest rate environment, investors are seeking out new sources of income. In a rising rate environment, a global equity income product has the added benefit of potentially diversifying overweight fixed income risk.

The good news for these investors is that while bond yields remain low, equities continue to be an attractive income opportunity.

But advisers should not be steering investors to just any equities — they should turn their attention to the array of quality dividend-paying stocks beyond U.S. borders, where they will find significant benefits, including higher yields.

Currently, about 75% of the world's dividends come from outside the U.S. But, surprisingly, the search for dividend yield by U.S. advisers and investors is largely limited to U.S. companies. It's understandable that investors might have a home bias, and default to an equity investment that's overweighted in the U.S. but in many regions around the world, the practice of returning earnings to shareholders is actually more common than it is in the U.S.

Advisers don't always have the tools and resources at their fingertips to easily spot such trends. In an effort to supply advisers with helpful research and dividend information, Henderson Global Investors recently commissioned a study on global dividend payments to measure and track the income the world's listed companies are returning to their investors.

The Henderson Global Dividend Index (HGDI) is a long-term study into global dividend trends. It is not an investable index, but rather a measure of the progress that global firms are making in paying their investors an income on their capital. The index breaks down by region, industry and sector, and enables readers to easily compare the dividend performance of countries like the U.S. that provide a larger proportion of global dividends than that of smaller countries. It is a resource that has been developed to help advisers and investors gain a better understanding of the world of income investing.

Most significantly, the study points to the impressive start global dividends saw in 2014, soaring 31.4% to a record $228.4 billion in the first quarter, compared to the same period last year. Although the British mobile telecoms firm Vodafone's $26 billion special dividend — a world record — accounted for almost half that increase, the numbers show that the underlying year-on-year growth rate in Q1 still reached 12.1%. That is the fastest quarterly growth rate since the end of 2012, when U.S. firms made big payouts ahead of an expected tax change.

Embracing a global dividend strategy benefits investors on multiple fronts. For instance, foreign companies yield more, on average, than U.S. issues do. And equity valuations outside the U.S. are looking more attractive, while the yields offered on those non-U.S. companies are nearly double those inside the U.S.

By focusing on companies overseas that have a higher-dividend paying culture, experienced portfolio managers are able to help their clients capture more yield through a U.S. based investments such as a mutual fund domiciled in the U.S. These funds are able to access foreign companies that are operating similarly to U.S. companies, but feature those more impressive valuations and yields.

The key is to look for high-quality names — value-oriented companies that aren't just paying dividends, but growing dividends every year. It is the growth of a dividend that serves as the best gauge of the company's health. The strategy also should involve conducting focused research to avoid value traps.

The search for yield is ongoing as central banks around the world maintain historically low interest rates. But the picture advisers can paint for investors is one of opportunity in the global dividend space. For example, the large cap dividend-paying stocks currently look attractive in Europe. Also, M&A activity is starting to accelerate, which is a good forward indicator for business activity.

Companies in many regions have been recognizing more and more the need to provide investors with dividends. So while a domestic bias is understandable, investors should take note of the evolving global landscape. With the right diversification and a strong research-driven stock-picking approach, 2014 is shaping up to be a good year for equity income investors.

Alex Crooke is head of global equity income at Henderson Global Investors and co-portfolio manager of the Henderson Global Equity Income Fund and Dividend & Income Builder Fund.

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