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Want Income? Right Now, You'll Find it Overseas

Finding income in a low interest rate world is tough. That makes many comparatively safe, generous dividend paying stocks more attractive than ever. Bond king Bill Gross, the manager of the world's biggest fixed-income fund, says investors should look overseas for yield and a new report from Standard & Poor's helps bolster that view.

When it comes to investing in dividend stocks for the long haul, a history of consistent payout hikes is critical. Naturally that leads many investors to focus on funds with exposure to the S&P Dividend Aristocrats, a roll call of companies that have raised their dividends every year for at least 25 years.

But S&P mutual fund analyst Dylan Cathers says dividend investors may be shortchanging themselves by focusing solely on U.S. equities. "With mutual funds, investing overseas may be a better place to search for dividends, based on yield," writes Cathers in a new report to clients. Indeed, at a broad level, overseas dividend funds offer significantly more generous yields than their domestic counterparts, the analyst notes:

The average dividend yield on an international large-cap core fund as of May 31 was 3.1 percent, compared to 2.2 percent for the average domestic large-cap core offering. Within the large-cap value peer group, the difference is similar, with 3.4 percent for international funds and 2.4 percent for domestic.
Cathers highlights three international large-cap funds with above-average dividend yields. Importantly, they all get five-star ratings by S&P analysts, have comparatively low expense ratios and are open to new retail investors:

Templeton Foreign Fund (TEMFX)

  • Pros: Dividend yield of 4 percent is well above the large-cap core peer average of 3.1 percent. Net expense ratio of 1.19 percent is below the peer average of 1.42 percent
  • Cons: Fees. Maximum sales load of 5.75 percent. Conservative investors should take note of the fund's above-average standard deviation.

Homestead Funds Inc. International Value Fund (HISIX)

  • Pros: Dividend yield of 3.7 percent is above the international large-cap value peer average of 3.4 percent. No load and a net expense ratio of 0.99 percent vs. peer average of 1.33 percent.
  • Cons: One-year return lags category by 1.65 percent and benchmark index by 2.1 percent, according to data from Morningstar. Ten-year return lags category and benchmark index by 0.5 percent and 0.4 percent, respectively.

American Beacon International Equity Fund (AAIAX)

  • Pros: Dividend yield of 3.6 percent vs. 3.1 percent for the international large-cap core peer group. Cheap. No load and net expense ratio of 0.46 percent vs. peer average of 1.42 percent.
  • Cons: Underperfomed vs. category and benchmark index in both 2009 and 2010, according to Morningstar. Three-year total return lags category by 3.1 percent and benchmark index by 2.9 percent.
Whether you're inclined to look abroad for income or not, allocating a greater portion of your portfolio into dividend funds may provide some protection in an uncertain investing and economic landscape, Cathers notes. That's because historically dividends have contributed a large chunk of an investment's total return -- and were practically a lifesaver for international investors last year. "In fact, in 2010, dividends accounted for 40 percent of international stocks' performance," Cathers says.

Image courtesy of Flickr user Stefan, CC 2.0.
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