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While several U.S. and non-U.S. dividend stocks have comparable yields, income-seeking investors may want to focus on total return—and that means looking abroad.
Although interest rates have been rising globally, income-seeking investors are still facing struggles generating income without losing principal. So, where should these investors look for attractive opportunities?
The answer may lie outside the U.S.
Investors should keep a watchful eye on non-U.S. equities, as they may outperform U.S. equities. This thinking extends to dividend stocks.
Traditionally, higher-yielding assets can be found in sectors such as utilities, telecom and consumer staples. While U.S. and non-US companies within these sectors offer comparable yields, investors still need to avoid losses in invested capital.
One approach is to focus on a stock’s total return—dividend income plus potential stock-price appreciation. The reason: even when U.S./non-U.S. yields are similar, we often find that the expected total return is higher in the non-U.S. sectors because those companies have relatively lower valuations.
Let’s look at valuations in the telecom sector. Chinese telecom stocks trade at 3.1 times the ratio of enterprise value (EV) to earnings before interest, taxes, depreciation and amortisation (EBITDA) and yield 3.0%. In comparison, U.S. telecoms yield 4.5%, but trade at more than double the valuation—7.4 times this year’s EV/EBITDA.
Additionally, China’s telecoms are expected to undergo a multi-year reduction in capital spending that should increase free-cash flow and lift return on invested capital, thus offering greater potential for dividend growth.
When looking abroad, it’s also important to differentiate by region. Consider European beverage companies. They trade at a 17.7 price/earnings (P/E) multiple on 2018 expected earnings in comparison to a 19.7 P/E for global beverage companies, though the dividend yield is comparable at around 3.1% for both European and global players. And in addition to attractive valuation, we project benefits from accelerated top-line growth and management-directed cost savings. Lastly, any cut to the corporate tax rate in the U.S. will also benefit their earnings since the U.S. is a significant profit pool for these companies.
Going global does not mean investors need to give up sector diversification. Outside the U.S., energy, financials and health care sectors yield 4.0%, 3.8% and 2.8%, respectively. This is significantly higher than in the U.S. where they yield 2.6%, 1.7% and 1.7%, respectively.
Within these sectors, we see an excellent opportunity in major European exploration and production (E&P) companies, which have an average dividend yield of 6.1% versus U.S. majors’ 3.5%. Furthermore, we think the earnings and the cash-flow outlook is better; the European companies are expected to have mid-single-digit increases in production, while production is declining at major U.S. companies.
In Many Sectors, Non-U.S. Stocks have Higher Yields Than U.S. Counterparts
European E&P majors trade at 5.4 times EV/EBITDA in contrast with major U.S. companies, where the same metric is 8.6. As these companies trade abroad, many are available to U.S. investors through American depositary receipts, or ADRs, which are priced in U.S. dollars and pay dividends in dollars, too.