Many investors today know that investing in companies outside the US offer the benefits of capital appreciation for diversification. What may not be as familiar is the recent evolution of a dividend culture abroad that could represent a significant investment opportunity. Typically, dividends are seen as the hallmark of quality. If a company is committed to a regular dividend payment over a long period of time, this is often a signal to shareholders that the company is profitable and that they are willing to share their good fortune. Nothing like getting regular income checks every quarter.
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But what may be unknown to investors is that over the last ten years, US companies have increased their dividends more so than any country in the world. But over the past three and five years, those numbers have diverged. During the three years that ended March 31st, 2008, the numbers of companies abroad that increased their dividends each year was more than double than those in the U.S. What's more, a number of markets outside the US relatively pay high dividend yields. As of June 30th, 2008, for example, the companies in the MSCI Pacific Extra Pan Index pays an average of 3.93% and companies in the MSCI Europe Index offered an average 4.10%. Both were well above the 2.17% average US securities in the MSCI USA Index.
Are Dividends Old Fashioned?
The trend towards paying dividends has arisen as millions of baby boomers approach retirement and shift from the accumulation to the distribution phase in their investment life. Back in the 1990s, dividends were pretty much thrown out the window, as many investors wanted to buy the dot com stocks. But after the dot com bubble burst, dividends were once again revisited and seen as a staple in anyone's investment portfolio.
Over the past 15 years, companies based outside the US have paid the highest dividends often provided the highest returns. In a study that was done by Capital Guardian and Trust, shows that the MSCI World USA index from June '93 through June 2008,. Research also shows that over a course of economic cycles, companies that pay the highest dividends tended to limit losses when the market was declining, as well as deliver high returns over a period of time.
Don't Forget About Diversification
Diversification and the potential for capital appreciation have always been important reasons for investing abroad. The increasing number of companies outside the United States that are paying dividends, further strengthens the compelling argument for including international equities in your investment portfolio. Find out more about what is a dividend.