Funds for Foreign Dividend-Growth Stocks

A dividend-growth strategy works even better overseas than it does in the U.S. That’s because foreign dividend-paying stocks generally yield more and are less volatile than their domestic counterparts. They also tend to lose less in down markets, yet still manage to outpace the broader international stock market over time.

According to a Fidelity study that tracked performance from 2002 through 2011, foreign stocks typically yielded 4% to 5%, while U.S. stocks paid about 2%. Over the same period, shares of foreign companies with a history of raising their dividends returned 6% annualized, while U.S. companies that regularly raised dividends gained just 4% a year, on average.

Few dividend-oriented foreign and global stock funds focus on companies that regularly boost their payouts. And some are too new to endorse. We’re keeping an eye on Fidelity Global Equity Income (symbol FGILX), which started in May, and Pimco Dividend and Income Builder (PQIDX), which launched last December.

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Among actively managed funds, Matthews Asia Dividend (MAPIX) has been investing in dividend growers since its 2006 launch. Its ability to tap into the region’s fast-paced growth with high-quality, dividend-growing stocks was a big reason we added it to the Kiplinger 25, the list of our favorite no-load funds. Its three-year annualized return of 14.4% has outpaced the MSCI EAFE index, a barometer of foreign stocks, by an average of almost nine percentage points per year (returns are through June 29).

It’s easier to find a foreign-stock ETF with a strong dividend-growth tilt. PowerShares International Dividend Achievers ETF (PID) invests in foreign companies that have raised dividends for at least five years running and trade on Nasdaq or the New York or London exchanges. Over the past three years, it gained 12.2% annualized, an average of six points per year ahead of the MSCI EAFE. The ETF yields 3.5%. Among its top holdings is British drug maker AstraZeneca, which pays a peppy 6.2%.

Also intriguing is iShares Dow Jones International Select Dividend Index (IDV). The index the ETF follows starts with high-yielding stocks but throws in other criteria, such as a screen for rising dividends over three years. The ETF returned an annualized 12.5% over the past three years, outpacing the EAFE index by an average of six points per year. It yields 5.4%.

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.