Why You Should Look Abroad For Higher Yields…
Around the Thanksgiving table during most years, it usually doesn’t take long here in Louisiana for the topic of conversation to migrate to LSU football. But not this year. After a perfect 15-0 campaign in 2019 that culminated in a National Championship, this year’s underachieving squad has been a sore disappointment. Fans are ready to write off this season as a disaster – much like 2020 in general.
“So how about that stock market,” my father-in-law piped up, in between bites of turkey and dressing. I gave my standard response, “Which one?”
This earned a few quizzical stares.
I knew he meant the Dow Jones Industrial Average. Most people do when casually discussing “the market”. Plus, the iconic investment barometer had been on all the nightly news programs that week after piercing the 30,000 threshold for the first time, a historic accomplishment.
Still, I like to remind people that there is more than just one market.
The Dow tracks the performance of just 30 well-known stocks – a minuscule fraction of what’s out there. It tells us almost nothing about the performance of small-cap companies like you’ll find in the Russell 2000 Index. Nor does it reflect the returns of foreign stocks trading on overseas exchanges – which was my main point.
International Stocks Are Worth A Look…
Having spent many years as a financial advisor, I know that most investors tend to neglect (if not ignore) the international component of their portfolio. Big mistake. Businesses headquartered in the United States account for roughly 50% of the world’s total stock market value. That means the other half lies beyond our borders. As I like to say, avoiding foreign companies such as Unilever and Nestle is like going to the supermarket and limiting your shopping to the even-number aisles.
It’s not just a matter of selection.
Since 1970, the MSCI World ex-USA Index (which tracks nearly 1,000 stocks from 22 developed foreign countries) has outperformed a comparable basket of U.S. stocks in 25 calendar years, while red, white, and blue stocks have won out 26 years. That’s just about exactly a 50/50 proposition.
So history says you can expect to capture better returns in international markets like Germany, for example, about half of the time. The results are similar when looking at emerging markets such as China and Brazil.
This is why our High-Yield Investing portfolio always maintains exposure to international markets. In fact, we have an entire section of our portfolio dedicated to them. But truth be told, we’ve had a relatively modest weighting to international stocks in recent years. And that’s been the right call, because foreign stocks have generally lagged.
That differential has widened during the turmoil of 2020. The benchmark S&P 500 has climbed 16.7% this year, while the MSCI World ex-USA Index has inched up just 3.3%.
But that’s yet another reason why international markets may have the edge in 2021. There will likely be a reversion to the mean. And there are other macro factors at play that could accelerate a rotation into foreign stocks, such as cheaper valuations overseas — and stronger GDP forecasts. Looming corporate tax hikes could also weigh on domestic equities in 2021.
And let’s not forget, corporate boardrooms throughout Europe and Asia also tend to place far more importance on dividends than their American counterparts. Of the world’s 23 developed countries, the U.S. ranks next-to-last in dividend yield. Only India is stingier.
You’ll see much higher average payouts in Sweden (3.8%), Australia (4.4%), and Russia (6.3%), among others.
With all this in mind, I’m planning to focus more on international income opportunities over at High-Yield Investing as we move into the New Year. If you’re an income investor, then I strongly encourage you to do the same. As I always tell my readers, you don’t have to settle for the paltry yields the average dividend-payer has to offer. There are a number of ways we can earn higher yields without sacrificing safety or upside potential.
You just have to know where to look.
If you’re curious and want to know more, then I invite you to learn more about what we’re up to over at High-Yield Investing.