The Quest for Dividends

November 3rd, 2011 Posted in The Sovereign Investor Newsletter

The Most Important Part of a
Portfolio’s Total Return

By Jeff D. Opdyke, Editor, The Sovereign Individual

Dear Sovereign Investor,

I still remember the day in the spring of ‘97 when I showed up at a NationsBank branch in Irving, Texas, to deposit a dividend check … in New Zealand dollars.

The bank teller laughed.

I had only recently opened my first overseas brokerage account – in Auckland – and the appliance-maker that I owned had sent me my first dividend check denominated in a foreign currency. Given that NationsBank was a super-regional bank, I figured it could handle such a check.

“Not going to happen,” the teller told me. The bank was simply unequipped to accept checks drawn on a foreign account.

Ultimately, I opened a bank account in New Zealand and tied it to my brokerage account, and never again had to worry about giggling tellers here in the U.S.

And now I tell my friends that story, not because of the challenges of dealing with foreign-denominated dividend checks in America, but because of the dividends themselves. For income-oriented investors, there’s a lesson here.

In a Low-Interest-Rate Environment,
Dividends are All the More Important

The thing about dividends is that historically they’ve been a significant part of the stock market’s total return through the years. It’s sometimes difficult to recognize that when you look across U.S. stock markets over the past decade because U.S. companies typically have been more interested in retaining their earnings for other purposes – usually acquisitions – rather than sharing the wealth with shareholders.

Still, over the past century dividends and dividend-growth have accounted for as much as 90% of U.S. equity returns.

And today dividends are all the more important because of the low-interest-rate environment we’re stuck in for at least another 18 months … or so says Ben Bernanke. Right now bank CDs, savings accounts and Treasury paper are all yielding 1% or less.

The S&P 500 yields about 2.4% – more than 20 times what you’d earn holding Treasury notes for the next year.

But you can earn even better than that by going overseas and owning the dividend-paying shares of big, safe blue-chip companies that trade in markets like Sweden, Australia, Singapore and Canada.

That’s what I’ve been doing. For 16 years now, I’ve been operating from a host of overseas brokerage accounts, and I’ve learned firsthand that foreign companies are far-more likely to pay dividends to their shareholders. Equally important, they’re much-more likely to offer larger payouts.

Alongside the fatter dividends, you also gain foreign currency exposure. As the U.S. dollar weakens, the value of the dividends you receive is even greater in dollar terms, boosting your income even more.

Here’s an example of what I’m talking about…

Swiss insurance giant Zurich Financial, back in May 2001, paid its shareholders a dividend of 17.25 francs. A decade later, in April 2011, it paid shareholders a dividend of 17 francs. Not much changed really … until you look at that dividend in currency-adjusted terms.

In 2001, the dividend amounted to $9.72.

In 2011, a slightly smaller dividend amounted to $19.37 – a massive 105% leap, as you can see it in the chart below.

That was all thanks to the ever-weakening U.S. dollar. As the greenback lost value to the far-stronger franc, the dollar value of Zurich Financial’s dividends soared.

Earn 10% in a Safe Danish Stock

Just recently I began compiling a list of the highest-yielding stocks in 22 markets around the world. I’m doing this to get a feel for global yield these days. So far I’ve found nearly 220 stocks yielding more than 5%. Many yield more than 10%.

And remember, these are blue-chips, stocks that are constituents in the local version of a Dow Jones Industrial Average that exists in every country.

One that I’ll tell you about today is TDC A/S …

TDC is a Danish telecom company with operations in landline and wireless phone service, broadband Internet and pay-TV. It’s a market leader in all its segments.

And based on a likely range of expected dividend payments for 2012, the company is yielding between 9% and 10.8% at current prices.

In May it snapped up low-cost rival Onfone, strengthening its leading share of the domestic Danish market. In so doing, it also changed market dynamics to TDC’s advantage.

Prior to the acquisition, Onfone’s traffic had been running across another company’s network. With its purchase, however, TDC has undercut that competitor by moving Onfone’s traffic onto the TDC network, effectively pilfering the competitor’s revenue stream. The upshot is that the Onfone purchase has quieted competitors and will likely force consolidation among smaller telecom companies so they can better match up against TDC in the future.

For TDC shareholders, the Onfone deal will allow it to raise prices a bit, strengthening the earnings and bolstering the company’s hefty dividend payout.

At the moment TDC trades for about 45 Danish krone (US$8.47). The shares are worth closer to 55 krone (US$10.35). So you have a potential gain of 22% in the shares. On top of that, you get the chunky dividend for an all-in return for 2012 in the 30%-plus range.

And you get the ongoing dividend growth of a major telecom player in a safe currency in northern Europe … plus the likely strengthening of that currency against the U.S. dollar over time. Indeed, over the past decade, the krone has gained about 50% on the greenback.

The shares trade on Nasdaq OMX Nordic under the symbol “TDC.” Any brokerage firm that provides access to OMX Nordic will be able to trade the shares.

Until next time, keep a global view … and don’t overlook the dividends.

Jeff D. Opdyke
Editor, The Sovereign Individual

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