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The five-year run-up in U.S. stocks has been great for long-term investors already in the game. For new investors, the run-up is less great: Value and yield have been largely wrung out of the market. New money must scrounge and claw to unearth quality income stocks.
As an income investor, I can sympathize with the plight of other income investors, particularly those who prefer funds over individual securities. With the S&P 500 trading at 19.5 times current earnings and yielding 1.9%, it’s difficult to argue U.S. stocks, and likely broad-based funds, are undervalued.
So why argue? The better strategy is to simply look elsewhere.
The good news is that beyond our borders value and yield reside. The better news is that value and yield reside in first-world markets. Investors needn’t venture into the risky backwaters of Latin America or Eastern Europe.
I say that because most Western stock markets have underperformed our own. London’s FTSE 100, Australia’s ASX, Germany’s DAX, France’s CAC 40, and Canada’s S&P/TSX all underperformed the S&P 500 in 2013. Relative underperformance suggests these markets are peppered with better income values.
I believe this is the case, which I can prove by way of comparison.
The SPDR S&P Dividend ETF (NYSE: SDY) is a solid income-investment vehicle. The fund holds all the stocks in the S&P 1500 that have raised their dividends every year for the past 20 years. It’s basically a dividend-aristocrat fund composed of America’s largest, most persistent dividend growers.
Unfortunately, the SDY is also a pricey vehicle. The fund trades at 18 times current earnings. Persistent price appreciation has driven the dividend yield down to 2.2%.
Income investors would be better off with another SPDR product, the SPDR S&P International Dividend ETF (NYSE: DWX). This international stock fund owns 123 of the highest-yield companies outside the United States and weights them by yield. By doing so, DWX is able to construct a portfolio of dividend stocks that generates a 6.9% yield, triple the yield of the SDY. What’s more, this international stock fund trades at only 13 times current earnings.
Companies from Western Europe dominate the portfolio at 26.1%. Australia follows with a 22.6%. The United Kingdom is third, with a 9.6% weighting. Canada and South Africa round out the top five, with 6.7% and 3.3% weightings, respectively. Together, these countries comprise nearly 70% of the portfolio.
DWX isn’t reaching for risky yield either. The fund concentrates on large-to-mid-cap companies in financial (23%), telecom (18.5%), industrial (12.7%), utilities (12.7%) and energy (11.1%) sectors. These are established sectors populated with established companies.
In addition to yield and value, DWX offers exposure to companies that trade thinly in the U.S. OTC market, or that don’t trade it all. These companies benefit a portfolio because foreign stocks are less correlated with U.S. stocks.
With DWX, investors not only get current high yield but the opportunity to realize significant share-price appreciation. With the Eurozone showing signs of breaking out of its prolonged recessionary funk, DWX could easily outpace its U.S. counterpart, the SDY, in 2014.
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