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The current financial upheaval isn't making you anxious
about the market, it's making you nervous about your money. You want to know if your bank is in trouble, if your
retirement funds are safe and if your stocks are going to
lose even more of their value.
That's a lot to worry about. And a lot of people should be
worrying. No sector is safe. There's not a 401(k) balance in
the country that doesn't suffer from a 777-point drop in the
Dow (the exact decline we saw on Monday, Sept. 29th). The market is tumultuous, and even with a government
bailout, many portfolios will continue to be in the red for
some time. In fact, given market conditions and growth
projections, we think a complete turnaround -- just getting
back to square one from where we are now -- could easily
take years.
But that doesn't mean you should put your money under the
mattress. There are steps you can take to protect your
money. It reminds us of the adage about safety in numbers --
especially when those numbers are dividend yields. The best
first step you can take is to investigate high-yielding
international companies.
Here are three reasons why international income investing --
generating cash returns through the world's best
dividend-paying companies -- is the most prudent type of
equity investing in today's market.
Safety Factor No. 1: Dividend-Payers are
Found in
Mature Industries
Money always goes where it is treated best -- that's one of
two immutable laws of economics. Investors demand a rate of
return and they'll put their money to work someplace else if
they don't get it.
That return can come either from capital gains or cash
payments in the form of dividends.
Capital gains are contingent upon an increase in the share
price -- otherwise we're talking about a capital loss. In
general terms, stock prices are tied to earnings performance
and expected future earnings performance. If earnings rise
and continue to rise and the market is willing to pay more
and still more for the shares, then even a short-term
investor may be able to make money.
But some companies just can't grow: A power company already
has all the customers in town, and its rates are regulated,
so its ability to increase earnings is limited. So to reward
investors, and make up for the lack of strong growth, these
companies pay out a portion of their net earnings to their
shareholders.
Startups, for example, don't pay dividends. They're focused
on increasing earnings so as to drive their share prices
ever higher. There's nothing wrong with this strategy,
neither for a company nor for an investor, so long as both
parties remember that it's not sustainable for the long
term.
An
enterprise can only grow so fast for so long. If a company
with $5 billion in annual revenue were to grow at a 30%
annual rate, it would have $1.2 trillion in revenue after 20
years. That's obviously not very likely: At some point in
that progression, the growth rate would slow. In fact, it
has to. Otherwise, in another 10 years, that one company
would have revenue equal to the entire U.S. gross domestic
product.
To
seize upon an example from the headlines, we'll look at
Research in Motion (Nasdaq: RIMM), the maker of the popular
BlackBerry smartphone. The company's shares lost more than
27% last Friday after the company's earnings report. The
report said net income had jumped 72% during the second
quarter -- an announcement most CEOs would absolutely kill
for. But investors pilloried the stock. They sold it as fast
at they could, sending shares to a 52-week low. Why? RIMM
issued a lower-than-expected forecast for the current
period. When growth is the reason investors buy, they
sell -- and quickly -- when the growth seems to stall, even
after a tremendously successful quarter.
Mature, dividend-paying companies are far less subject to
such volatile ups and downs. Phone companies, utilities,
life insurers, chemical manufacturers -- these and other
mature industries produce goods and services that are vital
no matter the state of the economy.
These vital industries
are not particularly compelling stories. In fact, they're pretty mundane
compared with a fascinating product like the BlackBerry. But
would you rather see a news headline everyday that moved
your stock 5% one way or the other, or would you rather see
one headline every quarter announcing the board had declared
yet another dividend?
The BlackBerry is essentially a communications device. People use it to make phone calls and send email when
they're away from their desks. That's still the phone
company's primary job -- most homes and nearly every office
or business still have a landline. Wireline is a predictable,
safe, mature industry, and wireline providers generate a
tremendous amount of cash, which many of them pass along to
their shareholders.
The chart below shows the progression of an old-line European
telephone company's
annual dividend payment for the past five years. Even as
people embraced the BlackBerry and the iPhone, this
company's wireline business still made an absolute fortune,
which it passed to its owners.
In a volatile, down-trending market -- when safety is of paramount
concern -- would you rather bet on a wild-card earnings
release, or would you rather invest your money in a stable
company in a mature industry that has delivered steady dividend increases?
Safety Factor No. 2: Cash is King
When you invest in a dividend-paying stock, you're not
betting on the next earnings release to drive your gains
further, you're going to put your share of this quarter's
results in the bank.
Above, we mentioned that Research in Motion reported a +72%
year-over-year increase in its 2Q net profit. But it passed
exactly zero of those dollars to its shareholders -- and, in
fact, its earnings outlook cost shareholders more than $15
billion in lost market cap in a single day. But our dividend-paying company,
above, passed nearly every dime of its good fortunes along.
From 2003 to 2007, as its revenue and net profits grew, it
increased its dividend +141%.
And that payout couldn't just disappear into the ether, like
the paper wealth created by a rising (or inflated) stock
price.
Dividend payments aren't guaranteed, of course, but once
they've been paid, that gain is yours to keep -- it's money
in the bank.
Safety Factor No. 3: Geography
Dividend-paying stocks trade in markets all around the
world. In fact, most countries pay dramatically higher
yields than U.S. companies. It's not just because U.S.
companies are focused on growth, it's because our tax system
discouraged dividends for years by taxing them twice.
But the United Kingdom, New Zealand, Italy, Sweden and
dozens of other markets pay out roughly twice what U.S. companies
do. Why invest in U.S. companies that pay an average 2.5%
dividend when you can latch onto Italy's 7.1% average yield?
Plus, you'll be paid in a strong currency like the euro,
which further increases your returns.
Even setting aside the current market turmoil caused by the
crisis in the financial sector, U.S. companies are
responsible for only a quarter of the business transacted on
earth. Three-quarters of all economic activity occurs
without us -- often in economies that not only offer richer
dividend payouts, but which are also seeing substantially
stronger economic growth.
What's more, investing in these markets has never been
easier. Instant communication and online trading platforms
have brought the world's markets very close. In fact,
they're only as far away as your computer. You can buy
securities in almost any international market using your
current brokerage account.
Millions of investors unnecessarily limit their options
to domestic equities. History shows that this, in
turn, limits their gains. The U.S. benchmark S&P 500
has lagged the world's market indices for most investors'
lifetimes. But another S&P index, one that tracks the
world's strongest dividend players, has been among the
leaders, beating most high-growth markets over the long
term. Investors who are seeking shelter from the current
market flux can simply follow the money -- and 74.6% of it
is outside of U.S. borders.
The Second Law of Economics
The legendary investor Benjamin Graham -- Warren Buffett's
mentor -- said the most important element of any investment
was its margin of safety. Your portfolio likely lacks much
of a protective moat, as most U.S. investors stick with
domestic stocks. But an international income-oriented
portfolio offers three elements to increase your margin of
safety: Mature industries that pay cash dividends in
stable
countries with strong currencies and healthy economies.
Earlier in this piece, we spoke of the two immutable
economic laws. The first, as you may recall, is that money
always goes where it is treated best. The second law is that
people always act in their own ultimate best interest.
Our premium
High-Yield International
newsletter brings subscribers the best dividends in the
world -- stocks like the European telecom we mentioned above
that Nick Lanyi was recommending to his subscribers nearly
10 months before the subprime crisis obliterated Wall
Street. While the rest of the market is worried
that the sky is falling -- and, in fact, when the sky
actually fell -- High-Yield International subscribers
kept cashing
double-digit dividend checks.
Editor Nick Lanyi, in addition to writing painstakingly
researched feature-length reports, manages two portfolios --
"Reliable Income" and "Ultra High Yield" for subscribers to
mirror. And those who have heeded Nick's favorite picks have
seen returns of +12.7%, +16.8% and even a whopping +22.6% so
far this year --
all while the U.S. market has cratered, losing more than -20% of
its market value.
It's time to protect what you've worked hard for.
Waiting around for the U.S. market to come back could take
years -- years in which your assets could be working for you
all over the world.
Go here to learn how you can ensure that your
international journey takes you to the most profitable ports
of call with
High-Yield International.
-- Andy Obermueller
Co-Editor
Global Dividend Opportunities
GlobalDividends.com
839-K Quince Orchard Blvd.
Gaithersburg, MD 20878-1614
P.S.
-- Don't miss a single issue! Add our address, Editors@GlobalDividends.com,
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