Is It Time to Look for Dividends Overseas?

With U.S. stocks taking a turn for the worse and interest rates remaining near zero until late 2015, is it time to turn to China and Europe for dividends?

After 25 months of government bond buybacks, QE3 is finally coming to an end.
The Federal Reserve plans to pull the plug on its third round of quantitative easing later this month. An end to near-zero short-term interest rates likely isn’t far behind. The Federal Open Market Committee (FOMC) plans to start raising those rates before the end of 2015.
Once it happens, dividend stocks may suddenly not seem so appetizing. Income-seekers like you have flocked to dividend stocks, particularly dividend growers, in the last five years as interest rates on bonds, CDs and money-market accounts have fallen to almost nil. Now, many of those stocks are starting to falter.
U.S. stocks have taken a turn for the worse lately. The S&P 500 has declined 6.8% in the past month, dipping below 1,900 for the first time since May. The Dow Jones Industrial Average is now down for the year. It’s looking more and more like the long-feared market correction has arrived.
As U.S. stocks decline, dividend stocks are along for the ride. The SPDR S&P Dividend ETF (SDY) has declined 5.6% in the past month. If the broad market continues to tumble, chances are so will dividend stocks.
With U.S. stocks declining, and the average S&P 500 stock trading at a yield of a mere 2%, it begs the question: Is it time for income investors to put their money elsewhere? If you believe the Fed (which, admittedly, is always a dangerous thing to do), interest rates won’t budge from near zero for about another year. If U.S. dividend stocks continue to decline in the coming months, where is an income investor to turn in the interim?
The answer may lie overseas.
Many overseas indexes are cheaper than U.S. stocks, which trade at roughly 17 times future earnings. They also offer much higher yields. Consider the following options:

• European stocks, as measured by the MSCI Europe Index, trade at 14 times future earnings and at a yield of 3.7%

• Chinese stocks, in the Shanghai Stock Exchange, trade at a mere eight times earnings with a yield of 5%. Of course, a big reason why China stocks are so cheap is that the market has famously tanked in recent years. The Shanghai Composite trades 29% lower than its 2009 peak, despite a recent run-up.

• New Zealand’s stock market, if you really want to go outside the mainstream, yields 3.7% and trades at just 14 times earnings.

Of course, anytime you invest overseas – particularly in a debt-ridden region such as Europe or an emerging market such as China – you take on a certain degree of increased risk. But those yields are enticing. And unlike U.S. markets, those overseas markets are on the upswing.
The Shanghai Composite is up more than 15% in the last three months. European stocks are slowly starting to turn the corner, up 4% year to date. And New Zealand’s … well, two out of three ain’t bad.
My point isn’t to get you to ditch all your Procter & Gamble (NYSE: PG) and Johnson & Johnson (NYSE: JNJ) shares and buy every high-yielding European and Chinese dividend stock in sight. You’d be a fool to do such a thing, given the decades of dividend increases those and many other U.S. companies have demonstrated. That’s not likely to change even if we are headed for a full-on correction.
My point is to at least direct your attention to the coming shift in the income landscape. U.S. stocks are suddenly struggling. For all the dividend growth and paying back shareholders in recent years, the fact is that U.S. stocks, on average, still pay a relatively low yield. Other markets offer far greater yields, and stocks trading at bigger discounts.
As U.S. stocks fall, and as short-term interest rates remain near zero for likely another year, now is the time to broaden your horizons. There are attractive income options beyond our borders. It wouldn’t hurt to add an overseas dividend payer or two to your portfolio to help weather the storm.

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