I read about many dividend bloggers who just love international dividend stocks. International companies open the door to additional diversification and growth vectors. Since many international dividend stocks trade on the New York Stock Exchange (NYSE), it is easy to buy them. In fact, some of international stocks even pay their dividend in US dollars!
But the interest for “exotic” dividend payers exceed the passion of a few bloggers. I’ve experienced it myself through my blog and my investing service. Members have the possibilities to request stock analysts on the company of their choice. Since I created DSR in 2013, I have received many requests to review various international companies. Personally, I’ve been sceptical about them. In fact, I don’t really like international dividend stocks.
As you already noted, my blog and my personal portfolio has been built around the North American markets. I personally believe that I have it covered as the U.S. and Canadian markets represent 43% of the world market capitalization:
The Canadian market gives me a great exposure to exceptional companies in the “closed” market of Banks. Telecoms and utilities. As I like to dig further, I also found a few hidden gem among other Canadian picks (here’s how I found my picks on the Canadian market).
Then, the U.S. market opens the possibility for many international companies that are base just south of the border. Companies like Apple (AAPL), Hasbro (HAS), Microsoft (MSFT), Starbucks (SBUX), Texas instruments (TXN), UPS (UPS) and Visa (V) all have great international exposures.
Why would I need international dividend stocks to improve this mix?
I don’t believe you need international stocks in your portfolio. But I don’t expect you to believe me without further clarification. Let me share my thoughts on three important points for all investors: diversification, portfolio growth and efficiency.
A very common belief when it comes to adding international stocks to your portfolio is to provide additional diversification. If you can invest in European stocks or Asian companies, you would likely get exposure to other markets. Therefore, this should improve your diversification. This tends to be less and less true as businesses grow overseas, however. If we had this discussion 20 years ago, I would have agreed that old continent stock market cycles aren’t correlated with ours. Investing in European stocks at that time made sense. It was another way to smooth your returns and make sure that not all your positions hit red at the same time.
I have doubts that is still the case today. The 2008 financial crisis spread across the globe within seconds. I remember watching Asian and European markets closing in the red during my breakfast and then suffering a long day of losses on both the S&P 500 and the TSX. A few years later, the US market dropped suddenly during the summer of 2015. What was the cause of this pull-back? A market correction on the Chinese market! We covered this event in our August 2015 newsletter. This was a truly rare occasion for the US market direction to be “dictated” by another market. Fast forward to today and we see the commercial war between the U.S. and China to be clearly affecting both countries and their respective markets. Therefore, adding international stocks to your portfolio will actually do very little in terms of adding diversification. An article published in 2015 by Market Watch put forward the argument that the S&P 500 companies’ US sales were only slightly over 50% of their total revenue. In other words, if you buy large US companies, chances are you enjoy a strong international exposure in your portfolio already.
Another argument for investing in international stocks is the search for additional growth. Emerging markets are showing strong growth tends as their populations have not yet reached our “middle-class standards” and will no doubt spend more money in the coming decades. While buying shares of Luckin Coffee (IPO is coming soon) as it quickly grows in China seems quite appealing, it doesn’t come without additional risks.
Would you prefer holding shares of a multi-billion company that has proved the success of their business model over several decades (Starbucks (SBUX)), or would you rather invest in a new Startup that is killing its margin to gain market shares? I don’t know about you, but my little dividend growth angel sitting on my shoulders is drinking Starbucks Coffee.
The problem I see with emerging markets’ businesses is that they exist and evolve in a volatile environment on all fronts: politic, economic and financial. We have been reading many articles about shadow banking, non-transparent stock markets, and political influence in many of these emerging countries.
While you can make money with some opportunities, this is not an environment that is likely to seduce the dividend growth investor in me. Instead of going deep inside a company’s financial statements, I would rather select an ETF that covers such investments.
Is investing in international companies efficient for you? North American stock markets are the most developed and transparent stock markets on the planet. When we look at other markets, we usually need additional time to find and understand the information.
Earnings report timing (many companies publish their results twice a year vs quarterly), language use (financial expressions), coverage and currency translation by financial data services are all factors increasing the time required to properly analyze those companies. When you add the difficulties in understanding the culture and business environments those companies operate in, you get a very complicated recipe to build a credible portfolio.
I think it could be worth it if you could found a few gems that would make a dramatic change in your overall portfolio returns. Unfortunately, I haven’t found many gems offshore. Most great companies in other markets have similar businesses established in the US or (to some extent) in Canada. Therefore, this doesn’t seem to justify the additional time and effort required to perform the research on those foreign based firms.
There are many ways to get international exposure. Buying stock in foreign based firms is one, but it’s not the easiest solution. You can target North American companies generating a good part of their revenues offshore. Companies like 3M Co (MMM), Walmart (WMT), Nike (NKE), Colgate-Palmolive (CL), Coca-Cola (KO), Pepsi (PEP), Johnson & Johnson (JNJ), Starbucks (SBUX) and most tech stocks have significant exposure overseas. In fact, you can get a great diversification by picking stocks from the Dividend Achievers list. The Dividend Achievers Index refers to all public companies that have successfully increase their dividend payments for at least ten consecutive years. This includes many companies with international exposure that will keep increasing their dividend year after year.
Another way to get this exposure is through ETFs. There are plenty of international dividend paying ETFs that could grant you with instant diversification and exposure to other countries growth. The small fees paid inside the ETF will cover all the time saved for not reviewing international financial statement.
Investing in US companies and/or ETFs seems to be easier and a more efficient way to get exposure to international markets. This Friday, I will still offer my DSR members the coverage of 7 interesting international dividend stocks. You can register here to get the newsletter on time ?.
Disclaimer: I hold positions in AAPL, HAS, MSFT, SBUX, TXN, UPS, MMM, V, KO, JNJ.
I don’t any international stocks, and by international I mean including the United States. Long story short, I don’t see any real extra return that compensates for currency volatility. Extra risk for now reward.
I know that people say that Canada represents only a tiny fraction of the world economy, but that’s still nearly 2 trillion dollars. I only need a small fraction of that.