“Is it time to flee dividend stocks?” That’s what many investors are asking me amid the recent rise in bond yields.
My answer: Don’t abandon dividend stocks but be selective. I’ve long been advocating that investors searching for yield should look abroad for dividend income, and I continue to stand by that call. Here are five reasons why:
- Over the long term, dividend paying stocks tend to outperform in both bull and bear markets, according to BlackRock research.
- International dividend income still looks good compared to the alternatives. Even with the recent increase in bond yields, non-US dividend companies still offer more enticing yields than fixed income and US dividend counterparts. International dividend equities are currently offering 12-month yields of around 3.0% to 4.0% — higher yields than both US dividend payers and many fixed income instruments.
- The stocks are likely to continue to pay higher yields for the foreseeable future. While I believe the 10-year Treasury yield will slowly rise to about 2.25% this year, I’m not expecting a large increase in bond yields anytime soon as factors keeping a lid on rates – such as central bank buying of Treasuries and demand for Treasuries from institutional buyers – are still in place. In other words, in what is likely to remain a low-rate environment, I believe a broad-international dividend fund is still likely to offer a competitive yield.
- The stocks look cheaper than their US counterparts. Valuations of international dividend stocks are still very low compared with those of dividend-oriented US equities. For example, the average price-to-book ratio on the Dow Jones EPAC Select Dividend Index – primarily composed of companies domiciled in Europe and Asia — is roughly 1.70, while the ratio is 2.25 for the Dow Jones Select Dividend Index, which is composed of US companies.
- Non-US dividend funds offer international diversification. Non-US dividend funds such as the iShares Dow Jones International Select Dividend Index Fund (NYSEARCA:IDV) and the iShares Emerging Markets Dividend Index Fund (NYSEARCA:DVYE) are well diversified by both geography and sector and thus, can be good, broad instruments for gaining non-US international and emerging market exposure.
In short, there’s still a strong case for why investors in search of equity income should consider international dividend paying stocks.
The author is long IDV and DVYE