Finding Foreign Dividends in Exotic Locales
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, February 8, 2012: Issue #1704
Like a hungry predator, investors are on the prowl for yield. Many quality companies that were yielding 4% or 5% a year ago now have dividend yields below 4%, as prices have been bid up on nearly any stock with a respectable dividend.
As a result, investors are forced to look in some more exotic places. Real estate investment trusts (REITs), business development corporations (BDCs) and especially master limited partnerships (MLPs) have all gained popularity over the past year.
One area that has been a bit overlooked is foreign dividend payers.
There are quite a few American depositary receipts (ADRs) that pay a decent dividend – often more than their American contemporaries. However, you need to keep a few things in mind.
The dividend isn’t always paid quarterly. Most American companies that pay a dividend do so on a quarterly basis. However, foreign companies sometimes pay only twice a year or even just once annually.
Currency fluctuations may alter the amount of the dividend per ADR that you receive. The company usually pays its dividend in the local currency. If you’re invested in a Brazilian company, management will think about and pay its dividend in terms of Brazilian reals, not dollars. Any yield consideration will be based on its share price trading on the Bovespa (the Brazilian stock exchange). Holders of the ADR will also receive a dividend, but it will be dependent on how much was paid in the local currency and the exchange rate.
A Brazilian company could keep its dividend payment constant from one year to the next, but if the real appreciates in price, you’ll get fewer dollars. If the real depreciates, you’ll receive more dollars.
Therefore, for investors who prefer companies with a steady history of dividend growth, foreign ADRs may not match those objectives perfectly.
But that doesn’t mean there aren’t interesting income opportunities in foreign markets. As long as you can handle the currency fluctuations and the irregular payments, the yields are attractive enough to make it worth your while to take a look at some.
For example, CSN (NYSE: SID) is the sixth-largest steelmaker in the world. Based in Brazil, it earned R$2.9 billion in the first three quarters of 2011 and paid R$1.9 billion in dividends. The company pays its dividend in May and is expected to yield about 6% based on the current price.
Another Brazilian company with a healthy dividend is CPFL Energy (NYSE: CPL), the country’s largest privately owned energy company, with 13% of the national market. Roughly 75% of CPFL’s revenue is regulated, which means the company’s cash flow is rather predictable. That should give shareholders confidence that their dividend is secure. As long as the Brazil’s economy continues to grow, so should its dividend.
CPFL generated R$2.3 billion in cash flow from operations over the last 12 months and paid R$1.3 billion in dividends. It’s expected to yield 5.5% on today’s price.
Don’t Forget to Pay Uncle Santos
Often, when you receive dividends from a foreign company, taxes will be automatically taken out of your dividend payment. Since you already paid taxes on those dividends to the foreign government, the IRS will not make you pay it again. In fact, they’ll give you a tax credit against your U.S. tax obligations.
So, if you earned $1,000 in foreign dividends and paid $250 in taxes to Brazil, for example, you would be entitled to a $250 tax credit on your U.S. taxes.
Of course, when it comes to taxes, be sure to consult a professional tax advisor with any questions.
There are plenty of other foreign companies with juicy yields. You have to do a little bit of work in order to understand the story. But to feast on yields that in some cases are double what their American counterparts are paying, it’s worth putting in a little elbow grease. Your portfolio will thank you.
Good Investing,
Marc Lichtenfeld
Related Investment U Articles:
- Why Levered Cash Flow is Crucial for Picking Reliable Dividends
- 2012 Predictions for Income Investors
- The Dividend Stock Recovery: Get Ready for a High-Yield Bonanza
- Three of the Best Dividend Investments in the World
- Are Dividend Stocks Overvalued?
5 Responses to “Finding Foreign Dividends in Exotic Locales”
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Marc is a senior analyst at Investment U. His investment career started out at the trading desk of Carlin Equities in San Francisco, CA, where he executed dozens of trades each day for his clients.
When recommending dividend or interest bearing securities outside the U.S., please be sure to disclose the withholding tax situation in each case. It’s true that treaties with many countries allow investors to reclaim this when filing their Federal income tax,but I find that most are not aware of this. Also,in most cases,withholding cannot be reclaimed in IRAs and other qualified plans.(Canada is the only exception I’m aware of).
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“A Brazilian company could keep its dividend payment constant from one year to the next, but if the real appreciates in price, you’ll get fewer dollars. If the real depreciates, you’ll receive more dollars.”
Isn’t this backwards?
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Marc,
Regarding tax offsets. Our IRS always has its grubby hands out to make sure you don’t receive the advantages. When you pay a foreign tax it is correct that you can get a credit. However, they have a way to calculate your credit based on AGI (adjusted gross income) and then deminish the value of the credit. So, while in your example, you may or may not get the entire $250 as a credit but instead only 200 or less. Turbo Tax can do the calculation for you.
Herb
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Hmmm interesting Marc.
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Hi, great article.
Just a quick question about this part: “if the real appreciates in price, you’ll get fewer dollars. If the real depreciates, you’ll receive more dollars.”
If the real appreciates in price against the dollar, wouldn’t that buy more dollars? And therefore, wouldn’t we get more dollars when the currency gets exchanged from the real to the dollar?
Reason I ask is because I thought that an advantage of investing in foreign dividend-payers is the ‘currency affect’ if the local currency appreciates against the U.S. dollar.
Thanks!
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