Top 4 Reasons That Dividend Investors Need International Diversification

Written by The Dividend Guy on September 7, 2007

Depending on where it is you are reading this post from, the phrase international diversification will mean different things to dividend investors. For you folks in Australia it will mean investing in stocks from U.S., China, or any other country other that your own. For readers in the U.S., it means looking at Australia for potential investment opportunities. The key thing is that your portfolio owns securities that have primarily business activities outside of their home country.

In the global economy that we live in, there is a school of thought that if you hold Coca-Cola you are internationally diversified since Coke operates globally. The same thing has been said for holders of Royal Bank of Canada. However, I firmly beleive that we as dividend investors must go further than this.

To have a truly internationally diversified dividend portfolio it is important to go beyond the global companies such as Coke or GE. The reason is best summed up by these top 4 reasons to be internationally diversified in a dividend portfolio:

1. International investing provides diversification - spreading your investment risk among foreign companies and markets that are different than your home economy.
2. International investing provides more opportunities for growth - taking advantage of the potential for growth in some foreign economies, particularly in emerging markets.
3. Your own market may be highly concentrated - economies such as Canada or New Zealand have highly concentrated markets (i.e. energy in Canada) which limits diversification.
4. International markets help lower your investment risk - international and U.S. stocks often do not move in tandem, which provides investors with opportunities for returns even when their market is down. This chart from Schwab.com presents evidence of this:
Investment Correlations Among International Markets

Believing you need to be internationally diversified is a good first step, but the real question is how should an investor go about building international diversification into their dividend portfolio. My view is that I have my hands full with the analysis I do on my domestic holdings ( i.e. North American). To get into analysis of companies from other companies would add extra complexity I don’t need. Most important is that I don’t understand many of the international companies - you should buy what you know and I have no idea how Roche Holding AG operates, for example.

My approach is to use international index funds or ETFs to get the international exposure in my dividend portfolio. This will provide investor with a safer way to spread out the risk of international investing in a low cost manner. I personally hold two different international funds, one in my RRSP and one in my pension account:

1. iShares CDN MSCI EAFE Index Fund (XIN)
2. Jarislowsky Fraser International Fund - a pension plan fund

There are many others out there. You can check out Vanguard or iShares. Just be sure the fees are low and the fund or ETF is broadly diversified as opposed to regional (i.e China focused holdings).

Disclosure: I own shares of Coca-Cola, Royal Bank of Canada, and GE


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6 Comments so far

  1. Aaron September 7, 2007 9:34 pm

    I like the idea of diversifying internationally in this manner. The chart is interesting, since we always hear of global markets trading together. I wonder if the markets are increasingly trading together or if this stat will continue to hold true? Further diversification is the number one reason I like to add some internationals to my portfolio. I like DODFX and OAKGX for international mutual funds.

  2. 7 Risks of International Investing for Dividend Investors September 9, 2007 8:21 am

    […] As a follow up to my article from a couple of days ago, Top 4 Reasons That Dividend Investors Need International Diversification, I thought it was only appropriate that I cover the additional risks that come from investing internationally. There is a good article at the U.S. Securities and Exchange Commission website that covers the risks nicely. […]

  3. Personal finance at KMull.com September 10, 2007 6:11 am

    […] The Dividend Guy argues for International Diversification when Dividend Investing. […]

  4. The Div Guy September 10, 2007 8:10 am

    I like the new look of the site. I am looking for a couple more international stocks to add to my portfolio as well. I am going to look at 3i group, Natixis and Duetsche Bank.

  5. This Week’s Carnivals September 19, 2007 8:04 pm

    […] Top 4 Reasons for that dividend investors need international diversification- Just what the title suggests, reasons to diversify in international stocks. […]

  6. Weekly Dividend Investing Roundup - September 28, 2007 September 28, 2007 7:47 am

    […] will outperform the others in the last quarter of 2007 - good for you short term traders out there. International stocks won out and for good reason I […]

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