Going Abroad for Dividends
Retirees have always been prime investors in stocks that pay current income in the form of lush dividends. But we want to make the case that pre-retirees -- baby-boomers, young investors, anyone -- should take an income-oriented approach to stock picking, too. We offer two reasons, one historic and the other that looks to the future.
First, the history. A strategy of investing in high-income stocks consistently beats investing in no- or low-income stocks all around the globe. For example, Kenneth French, a prominent finance professor at Dartmouth's Tuck business school, found that over the 80-year period that ended in June 2007, the 40% of stocks with the highest dividend yields resoundingly outperformed stocks that paid little or no dividends. He also found that the high yielders whipped Standard & Poor's 500-stock index (one caveat: shares of companies that cut dividends performed poorly). French conducted similar research in Canada, Europe and elsewhere, with like results.
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Ned Davis Research analyzes dividends in a different way, but comes to similar conclusions. From January 1972 through May 2009, according to NDR, U.S. companies that regularly boosted their dividends returned 8.8% annualized, compared with 6.4% a year for the S&P 500 and a measly 0.8% for companies that paid no dividends.
Hypothesizing about the future is of course trickier. But, for argument's sake, say that we've entered an era of slower economic and earnings growth and greater uncertainty. If so, you might want to favor income-producing stocks over the promise of capital appreciation and rising stock prices. Cash dividends are a bird in the hand, an element of total return that is always positive. Even in normal times, dividends are statistically less than half as volatile as earnings -- and more stable than stock prices.
That is one reason we're intrigued by Tweedy, Browne Worldwide High Dividend Yield Value (symbol TBHDX). Why look for dividend champs globally? Consider the alternative. If you're constructing a diversified portfolio, do you, for instance, want to be confined to Detroit carmakers? Or to financial stocks, which, until the financial sector committed hara-kiri, were by far the most prolific source of dividends in the U.S. market?
But there's another reason to extend the hunt for dividend income abroad. Dividends seem to get more respect in Europe, Australia and other parts of the world, and that shows up in higher yields in many foreign markets. "Dividend pay-outs in the recent past in the U.S. have been sacrificed for stock buybacks," says William Browne. But, says Browne, one of the Tweedy, Browne fund's five managers, dividends are "more sacrosanct" in Europe.
Tweedy, Browne, a venerable New York City-based money manager known for its deep-value approach to stock selection, launched the dividend fund in September 2007. The managers try to identify stocks that sell at discounts to what they deem to be the true value of the underlying companies and that offer above-average dividend yields. Says Browne: "We are giving up a bit of the discount to intrinsic value in return for a better dividend yield for the company." Browne says the total returns achieved by the two strategies should be roughly the same, but that the dividend-oriented one generates more current income.
One of the fund's U.S. holdings is Genuine Parts (GPC), which has raised its dividend 53 consecutive years. At its June 18 closing price of $33.27, it yields 4.8%. Genuine is the largest auto-parts distributor in North America, with an ability to whisk fenders and other parts to body shops.
England's Diageo (DEO), the world's largest liquor producer (top brands include Johnnie Walker and Tanqueray), competes in an utterly different business. But here, too, a strong distribution system underwrites profits, cash flows and dividends. Says fund co-manager Thomas Shrager: "Diageo has the largest number of leading brands, so it fills more of distributors' trucks. Distribution is key in alcohol." At $55.97, Diageo yields 4%.
Other large holdings include Philip Morris International (PM), the world's largest cigarette maker, and Total (TOT), the French oil giant. Both companies (Philip Morris through its predecessor, Altria) have regularly boosted their dividends, even during recessions. At $42.53, Philip Morris yields 5.1%; Total yields 5.9% at its closing price of $54.10. Tweedy, Browne is also keen on Pearson (PSO), the British publisher, mainly for its large U.S. textbook publishing business. The stock, which closed at $9.91, yields 6.4%
What all these five disparate companies have in common is high yield, steadily rising dividends and the expectation that their income streams will continue to flow. Overall, the average weighted yield of stocks in the Tweedy, Browne portfolio was 4.8% as of May 31. Based on the past 12 months' worth of dividends, the fund's yield to shareholders is 3.6%.
The fund, which charges 1.37% in annual expenses, returned 3.2% year-to-date through June 17, trailing the MSCI World Index by 1.8 percentage points. In 2008, its first full year, Worldwide High Dividend Yield Value lost 29.4%, outpacing its benchmark by 14 points.