Overseas shares that investors should learn to love

Tom Bailey argues the case for looking beyond the UK for the best dividend-paying shares, flags up potential pitfalls, and asks professional investors to tip their favourites in different regions.

UK companies as a whole have been among the world's most reliable and generous dividend payers historically. One analyst mentions:

"Dividend payments date back to the mercantilist origins of the British Empire. At the time, ships and voyages were funded by the wealthy, who took their cut on the return of those vessels, once costs had been met and goods sold (assuming the ships returned)."

Today, the UK is still ahead of many countries in terms of dividend payments. Currently, the UK market is on a yield of around 5%, way above those in most developed markets.

However, increasingly, the rest of the world is serving income investors better than it used to. Moreover, by including dividend-paying companies from overseas in their portfolios, UK investors can diversify further, thereby reducing risk.

Ben Lofthouse, manager of Henderson International Income Trust (LSE:HINC), says: "It makes no sense to eschew overseas companies. Investors who add an international element to their share portfolios spread their investment risk, not just across a wider range of different economies but across sectors and companies." 

However, whether investors look for income overseas or prefer to stay at home, it is important that they delve into the dividend detail to assess future sustainability and reliability.

The rest of the world is catching the UK

One valuable tactic is to examine the dividend history of a company. According to Stuart Rhodes, manager of M&G's Global Dividend fund: "History is a good indicator of whether a board has shown a willingness and commitment to pay a dividend. We look for companies that have been growing their dividends for 10 years or more."

Here, we outline some companies in different regions of the world with excellent dividend track records.

Dividend hot spot

US companies have historically been more growth-orientated than firms in other countries, using cash to invest and grow, and in turn rewarding investors with capital gains. When companies do reward shareholders, the structure of the US tax system means that share buybacks are often favoured. The S&P 500 index's aggregate yield is about 2%.

However, that doesn't make the US a no-go zone for income investors. The US economy is the world's largest, so the US has more large-cap, dividend-paying firms than any other country. According to research by M&G, 205 US companies with a market cap exceeding $3 billion (£2.3 billion) have grown their dividend over the past 10 years. In contrast, only 27 UK companies and 18 Europe ex UK companies have managed to do the same.

One of the most reliable US dividend payers, according to Marc Pullen, senior equity analyst at Canaccord Genuity Wealth Management, is the energy company Chevron (NYSE:CVX). Last year was the 31st consecutive year in which the firm increased its annual dividend. He adds:

"Moreover, the company is forecasting that it will generate around $30 billion of cash this year (at the Brent oil price of $60 a barrel) to fund a 6% annual dividend increase and $4 billion of share repurchases."

Pullen also picks out Coca-Cola (NYSE:KO), another US titan. The drinks company has paid a quarterly dividend since 1920 and increased dividends in each of the past 55 years. That record should continue, he argues, because of the company's exposure to emerging market growth.

Investment trust dividend heroes

Every year the Association of Investment Companies compiles a list of so-called dividend hero trusts, those that have increased their dividends for 20 or more consecutive years.

While the list is still dominated by UK-focused income trusts, there are a number of internationally focused income-seekers on it, as our accompanying table shows.

Top of the overseas list is Bankers (LSE:BNKR). With its 30% allocation to the US and generous allocation to Japan and the rest of Asia, the trust has increased its dividend for 52 consecutive years. Next is Alliance Trust (LSE:ATST), also boasting 52 years of dividend increases. Almost half of the trust's portfolio is in the US, while the Eurozone and Asia make up 16.7% and 7.4% respectively.

Other trusts on the list include BMO Global Smaller Companies (LSE:BGSC) and F&C Investment Trust (LSE:FCIT), both with 48 years of dividend increases.

Top UK trust dividend payers

Source: Association of Investment Companies, as at 5 July 2019.

Mixed picture in Europe

The history of dividend-paying in Europe is mixed. Some of this may date back to the trade - and shipping-based European empires of old – in the Netherlands, say – but also to the family-run companies that dominated in countries such as Sweden. Admittedly, countries such as Italy have a lesser tradition in equities.

But over the past few decades a dividend-paying culture has spread across the continent, creating more opportunities for income investors.

One such opportunity, says Pullen, is Inditex. This Spanish retailer, owner of high street chain Zara, has had a strong dividend-paying track record since the early 2000s. Pullen says:

"It increased its dividend at a 24% compound annual growth rate between 2001 and 2018. A cumulative €20 billion was paid out in dividends."

Ultimately, however, the strongest dividend payers on the continent tend to be Switzerland-listed firms, often in the pharmaceutical sector. Roche Holding (XETRA:RHO), for example, has been the second-largest dividend-paying company in the world since at least 2013, according to the Janus Henderson Global Dividends Index. The company has increased its dividend for 32 years running.

Another Switzerland-listed dividend giant, Nestle (XETRA:NESM), has racked up 24 consecutive years of dividend increases and returned £52 billion to shareholders through dividend payments over the past decade.

Asia-Pacific alignment

The Asia-Pacific excluding Japan region grew dividends by 221% between the end of April 2009 and the end of April 2019. That's almost twice as much as the rest of the world’s combined 120% growth over that period.

This is a reflection of a greater emphasis on shareholder remuneration among companies in the region. The MSCI Asia Pacific ex-Japan High Dividend Yield index now has 169 constituents hailing from a wide range of countries, including China, Taiwan, Hong Kong and Singapore.

It's a similar story in Japan. In 2014, the JPXNikkei 400 index was launched. To be included in the index, a firm must have an investor-focused management perspective. In 2018, dividends from the index were 40% higher than in 2014.

One of the best dividend-paying firms in the Asia Pacific region as a whole has been Taiwanese technology business TSMC. It has paid consistent dividends over the past 10 years without any cuts, and has grown its dividend by an annualised 22% over the past five years.

Omar Negyal, investment manager of JPMorgan Global Emerging Markets fund (LSE:JEMI), says:

"Recently the company signalled its commitment to sustainable cash dividends and it will move to quarterly payouts from annual."

Lofthouse backs the share as having strong dividend prospects. He says: "The company is cyclical, but it has grown through the cycles and has a long history of distributions to shareholders."

Meanwhile, LG Household and Healthcare has proved a reliable dividend payer for more than 10 years. The South Korean consumer goods company has seen its dividend rise almost continuously since 2004, from 750 won (50p) per share to 9,250 won per share in 2019.

Nick Payne, head of global emerging market equities at Merian Global Investors, says: "We believe the firm's luxury cosmetics portfolio can continue to grow in China to support future profit and dividend growth." The company has high (4.7 times) dividend cover.

Scope in emerging markets

Hunting for dividends in emerging markets may seem a counterintuitive endeavour. Arguably, emerging market firms should be capitalising on growth in their domestic markets by reinvesting cash in order to expand. Nevertheless, some emerging market companies have become dividend heroes over the past decade – often banks.

A favourite among emerging market and Indian fund managers is HFDC Bank. It's is one of the most prominent in India and, according to Payne, markedly different from its developed market counterparts because of its "high profitability" and ability to "pay a rising dividend stream".

Payne notes that, despite the fact that the company reinvests much of the cash it generates back into its business, the firm has still delivered continuous dividend growth every year since 2006.

Another emerging market dividend hero is Sberbank (LSE:SBER), a Russian bank. The company can often be found in emerging market fund portfolios. Negyal says:

"It has paid an annual dividend for the past 10 years, but in the past five years there has been a much greater focus on dividends from the bank's management team."

He adds that the company's healthy balance sheet and "extremely competent management team" make its dividend sustainable.

Negyal is also positive about the dividend prospects for Itau Unibanco (NYSE:ITUB), a Brazilian bank. "We like the way the management team approaches the dividend payout: it thinks about the asset growth outlook together with capital requirements to drive sustainable dividend payments," he says.

"The bank's strong balance sheet has allowed its dividends to grow at a double-digit [annual] rate over the past five years."

Payne likes China Overseas Land & Investment (SEHK:688). "This property developer, based in Hong Kong and China, has consistently grown its dividends. That's very welcome, and a rare trait and discipline in an industry prone to boom and bust," he says. Dividends grew from 0.049 HKD per share in 2003 to 0.87 HKD per share in 2018. The firm's dividend cover is also high, at 3.85 times.

Dividend-paying heroes

Source: Refinitiv, as at 5 July 2019

Watch out for red flags

Despite the enticing income opportunities available around the world and the diversification overseas firms add to portfolios, investors should exercise some caution.

A solid dividend history is a good indicator that a company's dividend is sustainable, but it does not guarantee that the payout will be increased or maintained. Rhodes says investors must "watch out for certain red flags" that indicate a dividend may be vulnerable.

A key red flag, he says, is the dividend compared with the operating cash flow of a company. He explains that where the former amounts to north of 75% of the latter, that is troubling, as it means there is little room for the dividend to grow.

The dividend cover score can be another red flag. This is calculated by dividing earnings per share by the dividend per share. A low dividend cover score – of around one times or lower – suggests that a dividend is vulnerable, as the company is using most, if not all, its profits to fund its dividends. A figure of two or more times is viewed as comfortable, because it is a sign that a business is not over-distributing.

Other risks

There are other signs to watch out for. First, as the table shows, the yield for some companies is comparatively low. That in itself is not a bad thing, as a high yield often indicates risks and potential for a dividend cut. However, at the same time a low yield entails a lower return on investment. It could also mean that the company is very richly valued.

Second, currency differences are a risk that investors need to weigh up, particularly in relation to emerging market currency-denominated dividends, which are prone to rapid currency devaluations. If, for example, the rupee (India's currency) were to be devalued, dividends paid out in rupees would buy fewer pounds when they were converted into sterling.

Third, investing in individual company shares over pooled investment vehicles exposes investors to higher risk. A fund or investment trust is unlikely to see a huge capital loss, because it is relatively diversified. An individual share can lose substantial value, causing serious damage to an investor's portfolio.

Tracker funds that screen for dividends

Investors also have the option to seek income from international dividend payers through 'smart beta' dividend-focused ETFs. These screen for the best dividend-paying companies, usually based on their track records of paying dividends, and also their up and down fortunes.

Options include the ProShares S&P 500 Aristocrats ETF, which has given investors a total return of 121.8% over the past decade. Meanwhile, the SSGA SPDR S&P Pan Asia Dividend Aristocrats ETF has returned investors 79.4%. SSGA SPDR S&P Euro Dividend Aristocrat has been less successful, having returned 66.7%.

In contrast, the average return over the same period from an active global income fund in the Investment Association global equity income sector has been 69.2%, while the average active fund in the IA's UK equity income sector has returned 44.9%. Disappointingly, though, the SSGA SPDR S&P UK Dividend Aristocrats UCITS ETF returned just 14.7% over the decade, according to figures from FE Trustnet.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.