2015 was one tough year for stock investors. However, despite the meager 2% total return, including dividends, the overall stock market still outperformed long-term bonds, short-term treasuries, and commodities.
2016 has started on a difficult note with stocks opening with their worst performance in many years.
According to CNBC, despite the stock market still beating many other asset classes in 2015, it was the toughest year for returns since 1937 when the treasury bill beat all other returns with a meager 0.3% return.
Adding color to the difficult year, CNBC went on to point out that even the great Warren Buffett experienced his worst year since 2008, with Berkshire Hathaway shares down more than 11 percent year to date.
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Even cutting edge hedge fund suffered in 2015. One high profile example is Bill Ackman of Pershing Square Capital. He sent a letter to investors in December that said 2015 may be the fund’s worst year since it was founded in 2004.
What to Expect in 2016
Only time will tell what to expect in 2016. The market could resume its upward trajectory or this could be the start of a bearish downward wave in the stock market. We believe that the bullish case for 2016 still trumps the bearish one, but no one knows for certain what will actually transpire.
What Should Long-Term Stock Investors Do?
In the face of uncertainty, the smartest course of action is to stick to what has proven to be profitable over the long term. Drawdowns and lackluster market conditions are not a legitimate reason to deviate from time proven investing methods.
The single long-term investing method that has proven itself over the very long term is dividend reinvestment. Dividend reinvestment has been time and market-tested as a proven wealth building tactic.
However, today’s ultra-low U.S. yields have forced yield-hungry, dividend reinvestment, investors to look internationally for higher yields.
The majority of investors are focused on buying U.S. income stocks only despite the massive opportunities available outside our borders.
Lipper conducted a study supporting this fact by revealing that U.S. stock income funds have $359 billion in assets, however just $13 billion is allocated to international stock income funds. Most interesting, from the $1 trillion in global dividends paid in 2013, U.S. companies accounted for 37% of the total.
This means that 63% of all dividends paid come from international income producing stocks. To state it bluntly, many U.S. investors are missing out on the wealth building power of international dividends.
The huge investment firms are already well aware of this fact.
I recently read a powerful quote from Judy Sarayan, a fund manager at Eaton Vance. She summed up the reason why international stocks pay higher by stating, “There’s a much stronger dividend culture abroad… individual investors play a larger role in those markets, and they have always demanded more dividends.”
Drilling down into the specifics, the S&P 500 average yield is just over 2%. At the same time, the U.K.’s average dividend yield is 4.1%… Australia’s average yield is greater than 5% and New Zealand boasts the highest average yields at 5.3%.
Just to be sure, I am in no way suggesting strictly investing outside of the United States. The U.S. still holds tremendous opportunity in its stock markets. What I am suggesting is that investors look to diversify internationally in their search for yield. Adding the international scope to your search for yield can greatly enhance your success in the dividend investing game.
With that said, we have identified several high yielding stocks that you need to know.
If you already have a dividend paying portfolio of domestic stocks, one way to diversify into international dividend payers is via ETF’s. ETF’s offer a ready built and diversified portfolio of international dividend payers.
Currently, our favorite international dividend payer is the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSE:DBEF)
This Hedged currency ETF’s yields over 5%. The current dislocation of central bank strategy will continue to create volatility in the world’s markets. Being able to capture this volatility while earning dividends makes solid sense.
This difference in strategy results in currency volatility and without going into the unneeded details, suffice to say has created a demand for hedged currency ETFs.
DBEF’s small relative size with an average daily volume of only about 12,000 shares has kept it under the radar of many investors. However, with a yield of around 5.5% will likely attract positive attention. The ETF is comprised of 560 stocks from Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Japan, Italy, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the UK. This wide geographic diversification allows the ETF to hedge moves in the U.S. dollar and non dollar currencies.
Our next choice for diversifying into the international dividend space is the iShares S&P Developed ex-US Property Index Fund (NYSE:WPS).
This ETF provides investors a chance to profit from real estate markets outside of the United States. About 50% of this ETF is allocated to international REIT’s and the other half is dedicated to property developers. Hong Kong and Australia comprise 31% of the holdings with Japan at 29%. The rest is distributed among other developed nations. The ETF boasts a 12 month trailing yield of just over 3% providing investors solid yield as well as geographic diversification within the real estate sector.
Some of you may be willing to accept the risk for the potential of ultra-high yields by investing in individual international high-yielders.
Our favorite individual international dividend yielder is the giant Spanish bank Santander (NYSE:SAN).
Over the last year, the bank paid out $0.36 per share in dividends. This works out to a yield of about 9%. Clearly, these types of ultra high yields can make the single issue risk very appealing!
As in all dividend investing, it is critical to keep a few things in mind. It does not matter if the underlying stocks in your dividend portfolio are domestic or international, these truths are universal.
The truths are:
- Dividend Frequency Is Important
Dividend frequency is the number of annual times the company pays dividends. It is often overlooked when it comes to choosing the best long term dividend stocks
Most stocks pay dividends quarterly. Some stocks pay dividends annually or semi-annually. Other companies, particularly those designed to pay investors via dividends, pay monthly dividends.
You may be asking what it matters. Well, with all things being equal, the more frequent the dividend, the better. You see with dividend reinvestment, the more frequently you are paid, the faster your money compounds on itself.
- Yield Is A Function Of The Stock Price
While this may seem obvious to you, many investors don’t full understand the implications.
The yield/share price correlation is a critical and often overlooked fact about dividend investing. Let me explain with an example.
If a stock sells for $100 and pays a $5 per share dividend, the yield is 5%. If the same stock fell in price to $50.00, the yield would be 10%. Therefore, it’s crucial to make sure that the high yielding stock you are considering isn’t high yielding because of a plunging stock price.
Another thing to keep in mind is something called effective yield. Effective yield is personal and based on the price you paid for the shares.
It is critical that all dividend investors keep these two maxims in mind whenever building a dividend paying portfolio. Plenty of overly excited dividend investors have gotten burned by neglecting the true facts of dividend yield.