Why You Shouldn’t Be Afraid To Look Overseas For Bigger Yields…
It’s a well-known fact that U.S. companies (as measured by the S&P 500) offer a mediocre average dividend yield. Thanks to a rising market, it now stands at around 1.5%.
But if you cast the fishing net a bit wider, you can land much larger payouts overseas. Average dividend yields are currently running 2.6% in Germany, for example. You can get 3.8% in the UK, and about 3% in both Canada and Australia.
That’s more than double the S&P, without having to stray into riskier emerging markets.
Back in December, I hinted that one of my resolutions for 2021 is to look abroad for higher yields over in my premium service, High-Yield Investing.
Unfortunately, many investors shy away from foreign stocks. But consider this… the U.S. only accounts for about half of the world’s market capitalization. That’s like going to the grocery store and only shopping in the even-numbered aisles — you’re missing out on half of what’s out there.
Some of the trepidation comes from the fact that investing directly on foreign exchanges isn’t always easy. Not every brokerage is able to place buy and sell orders in Tokyo or Sydney or Johannesburg. And even then, foreign currency exchange can be problematic, and commissions cost prohibitive. Fortunately, there is a much easier way to invest in some of the world’s largest and most profitable businesses.
I’m talking about American Depositary Receipts, or ADRs.
Essentially, these are negotiable certificates issued by a qualified U.S. bank that represent ownership in a specific number of foreign shares. An investment bank such as UBS buys the real shares, puts them in a depository bank, such as BNY Mellon, which then issues depository receipts on them.
Sometimes this is done on a 1-1 basis. Other times, a single ADR might represent ownership in 2 shares, or 5, or another ratio that keeps the ADR share price from being too high or too low.
Let’s use an example from my own High-Yield Investing portfolio. U.K. pharmaceutical firm GlaxoSmithKline sells for around 1364 pence in London, which equates to around $19. But peers such as Pfizer (NYSE: PFE) are trading higher, so one ADR of GlaxoSmithKline (NYSE: GSK) has been set to equal two ordinary London shares.
These ADRs trade on the New York Stock Exchange, settle in U.S. dollars, and also pay dividends in U.S. dollars. (Shares also yield north of 5%, which is one of the reasons I own it.)
There are more than 2,000 of these securities that give U.S. investors access to a wide array of companies. They range from banks to telecoms to oil producers. While some can be bought and sold on the NYSE, most ADRs trade over-the-counter.
Now, before I continue, there is something to keep in mind. There are different tiers of ADRs, and that should factor into your decision-making.
Level I shares are usually thinly-traded and involve the least stringent compliance. Analyzing a business is difficult enough without worrying about different accounting standards and lack of timely financial reports. By contrast, Level II and Level III securities must be in full compliance with U.S.-based GAAP accounting standards and other filing rules and regulations. (The only difference between Level II and III is that the latter can raise capital through public offerings.)
Fortunately, if that’s a little confusing, just know that Level II and III ADRs typically trade on the NYSE or Nasdaq. But as you might expect, there are far fewer ADRs that meet these additional requirements, narrowing the initial pool down to several hundred.
You should also be aware that some countries impose tax withholding on dividend distributions. Also, falling foreign currencies relative to the dollar can also negatively impact the value of some ADRs, but the reverse is also true.
How I’m Investing
I already mentioned that we own shares of GSK in High-Yield Investing. We also own an energy producer and an insurance giant, among others.
But, as I said, we’re entering 2021 with a renewed focus on stable foreign companies that reward investors with large (and growing) dividends.
In fact, we just bought a Canadian telecom giant that pays 6% right now — a payout that’s sure to continue growing the longer we hold it.
The point is, if you’re hunting for income, it clearly pays to expand your search horizons. That’s why we’re constantly looking beyond the usual suspects over at High-Yield Investing.
If you’d like to join us in our search for the best high yields the market has to offer, then I invite you to learn more here.