I have discussed about my investing approach with respect to commodity asset class and investment vehicles. International developed/emerging equities are another asset class which dividend investors should include in their portfolios. I have spent some time to read and understand the characteristics of this asset class. In this asset class, i.e. international developed/emerging equities, there are three significant differences when compared to North American domestic equities. These differences are:
- Frequency of Dividends – Majority of the domestic equities pay dividends four times a year. The frequency of dividends paid by international equities is less than domestic equity class. At most, these equities provide two dividends per year (and only one in some cases). The implication is it slows down the dividend compounding growth of investments.
- Tax Structure – Depending upon the country, the taxation structure is different for each country. In most cases, the tax is deducted at source i.e. at the time of dividend payment. This tax deducted at source can be accounted during US tax returns. Nevertheless, the dividend payment is reduced by that amount. This again slows down the compounded dividend growth.
- Currency fluctuations – This is another factor that affects the dividend payment. The dividend may appear to be varying over a period of time, but could be due to currency fluctuations. For true reflection of dividend policy, individual investors should look at the company’s annual reports or dividend information section on website.
In general, as with any other asset class, here also I found the usual suspects of investment vehicles such as mutual funds, closed end funds, exchange trade funds, and individual stocks. The fund fees range anywhere from 0.3% to 1.1% (more in case of some mutual funds). One of the common issues that I found with most of these funds is that they use ADR listed on US-based exchanges. To put it mildly, I find this very perplexing, intriguing, and disappointing. If these institutional funds with large resources use the ADRs instead of actual currency in the corporation’s native country, then why should I pay unnecessary fees? What benefit do I have to buy their funds? In addition, in most cases, these funds consists of a more than 60 companies, which range from good to moderate to bad to worse. Investment in these funds essentially means covering the full quality spectrum.
Some funds from Wisdom Tree’s ETF portfolio are exception to above observations. Many of Wisdom Tree’s ETFs actually hold equity in corporation’s native currency. However, my concern about fees and capturing full spectrum of quality of corporations still remains.
At the time of this writing, I have investments in PID and AOD. While PID is meeting my portfolio requirements, I am not too happy about AOD. When I had initiated my position in AOD, it was an international focused (with 65%+) closed end fund. It changed its allocation to domestic stocks (65%+) over the period of last four months in 2008.
If I have to invest in ADRs, then why not invest in individual companies. The three characteristics that I have listed above remain same whether it is fund based investment or individual ADRs. As I mentioned in my earlier post at Dividend Tree, it is not necessary to invest in many corporations for diversification. The diversification can be achieved with few good quality individual equities also. Since the capital allocation to dividend portfolios are for 10+ years, investors should be willing to take relatively higher risk. For my dividend portfolio and individual investor looking for international exposure, I have a shortlist of following international equities (which pay dividends) for further analysis:
- Unilever PLC (UL) and/or Unilever NV (UN)
- Cadbury PLC (CBY)
- ABB Limited (ABB)
- National Grid PLC (NGG)
- Nestle (NSRGY)
- Siemens AG (SI)
- Vodaphone PLC (VOD)
- BT Group PLC (BT)
- CPFL Energia S.A. (CPL)
- China Mobile Limited (CHL)
- ICICI Bank Ltd. (IBN)
Individuals should perform further analysis (based on their risk profile) to evaluate how above equities fit into their dividend portfolios. Individual investor’s end goal should be to invest in at least five to six good quality international dividend growth equities.