Finding High-Yield Dividends Overseas
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, April 4, 2012: Issue #1744

Savvy dividend investors are looking overseas to companies like GSK and RDS.B for high-yield dividends. And you should too.

As investors’ thirst for income has driven up the price (and lowered the yield) on many dividend-paying stocks, those who have money to put to work in the market have had to search in more obscure places to find yield.

It’s worth your while to consider looking overseas. There are foreign companies trading on American exchanges paying juicy dividends, which should satisfy almost all dividend hunters.

Just like any portfolio, you should diversify your holdings across sectors, market cap size and regions. So if you find some healthy dividend payers in Brazil, don’t load up your portfolio with Brazilian stocks. Add one or two and look for stocks in other countries and regions, as well.

One thing you should clearly understand when investing overseas for dividends is the timing of the dividend payments. In the United States, most companies pay a quarterly dividend. But in other countries, dividends are often paid just once or twice per year.

Additionally, taxes are handled a bit differently. In the United States, when you receive a dividend, you will typically pay a 15% tax rate (although that may change next year). When you receive a dividend from a foreign company, often the government where the company is located will take taxes out of the dividend you receive. Don’t worry – you will not be the subject of double taxation. Although Uncle Sam tries to get his hands on every penny he can, this is one area where he cuts investors a break.

If you paid dividend taxes to a foreign government, you can usually take that as a credit against your U.S. taxes. The tax rate will differ by country of origin. For example, Argentina doesn’t take taxes out of the dividends paid, but Canada mirrors the United States’ 15% rate and Sweden will help themselves to 30% of your dividends. Those taxes are usually taken out before you receive the dividend. If you’re relying on the dividend for income, be sure you know how much you’ll actually receive after taxes.

Also, keep in mind that dividend payments can vary due to currency fluctuation. So even if a company keeps its dividend the same year after year, as an investor who’s paid in dollars, your dividend may rise and fall depending on the value of the currency.

A Couple Good Examples…

Now that you have a little background on foreign dividend payers, let’s span the globe to find some solid yields among the planet’s best companies.

GlaxoSmithKline (NYSE: GSK) – one of the world’s leading drug companies. Glaxo pays a robust 5.9% dividend yield.

Based in the U.K. but with operations all over the world, Glaxo is one of the best-positioned drug companies in emerging markets – a huge growth opportunity. In 2011, the company generated cash flow of 6.3 billion British pounds, while paying out 3.6 billion pounds in dividends, so the dividend payment is secure.

Oil company Royal Dutch Shell (NYSE: RDS.B) is based in the Netherlands, but is very much a global company. Royal Dutch Shell produces more than three million barrels of oil a day. In addition, it’s expanding its focus into natural gas.

The stock has a 4.8% dividend yield. Last year, the company generated over $10 billion in free cash flow, paying out just over $7 billion in dividends. Politics and the price of oil can impact the company’s earnings and cash flow, but Shell is an energy powerhouse that has proven it can weather even the toughest markets. It actually raised the dividend in 2008 and 2009.

The Bottom Line

International stocks are a terrific way of diversifying your portfolio and obtaining higher yields than might currently be available in domestic stocks of similar quality.

For some great ideas on where to invest, I highly recommend my colleague Karim Rahemtulla’s new book, Where in the World Should I Invest? Karim didn’t learn about overseas markets by reading about them on the internet. He’s traveled the globe, meeting with government and market officials, executives and entrepreneurs.

Where in the World… is informative and at times hilarious as Karim takes us on his adventures (and sometimes misadventures) around the world. I couldn’t put it down. I’m sure you’ll feel the same way. For more information on Where in the World Should I Invest?, click here.

Good Investing,

Marc Lichtenfeld

If You Can’t Beat ‘Em, Join ‘Em

by Marc Lichtenfeld, Investment U Senior Analyst

Wednesday, September 7, 2011: Issue #1595

Computers conducting high frequency trades make roughly 70 percent of stock trades on all U.S. equity markets.

Every day, supercomputers – owned by hedge funds – buy and sell millions of shares of stock, and sometimes the holding periods are as short as milliseconds. The goal of this sort of trading is to take advantage of market inefficiencies and scalp profits all day, every day.

High-frequency traders generate approximately $21 billion in profits annually for the funds and investors that own the computers.

And high frequency trading is only going to increase. While regulators pay lip service to leveling the playing field for the little guy, in reality, the supercomputers are going to have even more of an impact going forward.

The New Center of the Stock Market Universe

In the future, the center of the universe when it comes to the markets will no longer be on the corner of Wall and Broad Streets in lower Manhattan. Instead, it’ll be a red brick building in Jersey City. That’s where a new facility is being built for the New York Stock Exchange. It will house several football fields worth of computer servers.

Funds will be able to lease space from the Exchange in order to place their supercomputers in the same building as the Exchange’s computers, taking precious milliseconds off of the speed of their high-frequency trades.

The average investor would be a fool to try to compete against the institutions in this style of trading.

But there is good news. Super-computing technology is becoming more readily available to the everyday investor.

Last week, I wrote a column about inventory turnover and how using one piece of data could help you beat the market by more than 21 percent. It literally took me longer to type in my instructions than it did for the computer program I was using to crunch the data and arrive at a conclusion.

And that was analyzing every publicly traded company in the United States.

Successful Stock Analysis

 

To be a successful stock analyst today requires more and more computing power.

On my laptop, aside from a lightning-fast internet connection, is a trading platform that gives me real-time order flows, charting, news and every other type of information that I could possibly need about the market or a particular stock.

I also have a program, linked to a supercomputer, which can crunch millions of pieces of data on thousands of companies in just seconds.

As a 15-year stock market veteran and a former NASD licensed analyst, I have a pretty strong idea about what makes a stock a winner. For example, I’m much more partial to cash flow than I am to earnings. Net income can be manipulated much more easily than cash flow.

I look at balance sheet items like inventory and accounts receivables to search for signs that fundamentals may be deteriorating or improving, before they show up in the revenue or profits figures.

But through a super-computing program that I call S.T.A.R.S., I was able to test my theories. The computer could tell me, in just seconds, which variables were positively impacting performance and which were not.

As I mentioned last week, inventory turnover was an important component for success. Surprisingly, certain technical indicators that I had relied on in the past were not.

Through the process of adding and subtracting a very wide range of fundamental and technical variables, I was able to create a reliable system that, in a 10-year backtest, outperformed the S&P 500 by 1,568 percent.

It also beat the market nine out of 10 years. What I liked most about the system was that during markets that were bottoming, it suggested lots of stocks, ensuring plenty of exposure to the market. However, when markets were topping or about to sink, like in early 2008, the system only recommended a handful of stocks, limiting exposure to the market. Even then it was able to pick winning stocks like Alaska Air (NYSE: ALK).

If you’re interested, you can learn more about S.T.A.R.S. and my new service, the Oxford Systems Trader.

But the purpose of this column isn’t to be a commercial for the Oxford Systems Trader. It’s to emphasize that if you’re going to do your own research, you need powerful tools…

Three Ways to Speed Up Your Trading in the Digital Age

Here are three ways you can ensure you’re up to speed in this digital age.

  • If you’re a fairly active trader, or even just watch the markets during the day, get your broker’s latest trading platform. It’s usually free and will give you a great deal of depth into what’s happening in the markets and your stocks that day.
  • If looking for your own stocks, use a stock screener with lots of variables. My favorite is from Morningstar.
  • If you’re really committed to testing out your theories, get your hands on a program that allows you to backtest. Many brokers also provide this type of software for free. If not, there are commercial packages you can purchase from software vendors.

Whatever your style of investing, if you’re not harnessing the power of technology, you’re being left way behind. And chances are your investing returns confirm that statement.

The high frequency trading that’s conducted by hedge funds and their supercomputers are out of reach for most investors.

But thanks to improving technology, average investors can generate large profits that widely beat the market.

Good investing,

Marc Lichtenfeld

Follow The Wall Street Pros if You Want to Lose Money

by Marc Lichtenfeld, Investment U’s Senior Analyst
Wednesday, August 3, 2011: Issue #1570

My level of frustration over the weekend seemed to grow with every passing hour. I was furious that it looked like partisan politics were going to create a financial crisis that didn’t need to happen.

But there was something else that had my blood boiling. An issue that still hasn’t been addressed. Even with this recent reprieve, Standard & Poor’s and Moody’s (NYSE: MCO) are still threatening a downgrade.

If the United States loses its AAA rating, interest rates will rise, unemployment will likely go higher and the economy will tank.

It’s not the government’s lack of fiscal responsibility that irks me (well, it does, but not for the purposes of this column). It’s the fact that Standard & Poor’s and Moody’s still have the ability to not only move markets, but also to directly affect every citizen of this country (as well as others).

Aren’t these the same guys who completely missed the boat on the mortgage meltdown?

The AAA rating that the agencies threaten to take away is the same rating that they gave to mortgage-backed securities that were backed by subprime loans. The agencies never bothered to learn what the securities actually consisted of.

So in other words, the full faith and credit of the United States may get a lower rating as securitized subprime mortgages taken out by day laborers making $14,000 per year.

Now, I get the United States has some problems. But it was unlikely that the United States was actually going to default and leave bond holders without principal or interest payments.

The fact that they have any credibility and influence really aggravates me.

But I’m not surprised…

Wall Street Analysts Still Have Power

Analysts who, in the past, rated stocks a “Buy” despite really thinking they were garbage, still have the power to move share prices with upgrades and downgrades.

That’s equally as befuddling, considering how often they’re wrong.

Consider: In March 2009, Wall Street analysts recommended that 51 percent of your portfolio be invested in stocks – the second-lowest level in 12 years. Of course, March 2009 was the bottom of the market.

The peak stock recommendation by Wall Street analysts was in April 2001, well after the market topped a year earlier.

According to Businessweek:

  • From March 2009 (the bottom) to January 2010, stocks that were the favorites of analysts climbed 73 percent. Not bad.
  • Stocks that were their least favorites jumped 165 percent.

As a result, market success often comes by going in the opposite direction of these Wrong Way Corrigans (just ask the few hedge fund managers that shorted the AAA-rated subprime-backed securities).

One of the reasons is that as these analysts are proven wrong, they often play catch-up by upgrading the stock, providing more fuel to the upside.

So I like to look for stocks where the majority of analysts don’t rate the stock a “Buy.”

One of my favorite names in this category is Fastenal (Nasdaq: FAST).

Fastenal makes nuts, bolts and other industrial and construction supplies. Not surprisingly, in this economy, few analysts are bullish. In fact, only four out of 11 rate it a “Buy.”

However, despite the sluggish economic environment, Fastenal has been growing its businesses.

  • Earnings and revenue growth have been strong the past two quarters, margins are improving and the company plans to hire up to 200 people per month for the foreseeable future.
  • It has no debt and a two-percent yield.

This is just another example of where I expect the analysts to be wrong.

But it’s not just the analysts who aren’t making you money – mutual fund managers notoriously underperform the market.

You Have the Power to Ignore Wall Street Analysts

Various studies have shown that approximately 80 percent of mutual funds underperform their benchmarks in any given year and that the average fund underperforms by two percent or more.

And in many of those cases, you’re paying for the privilege of underperformance. Some mutual funds have loads (up-front fees) of five percent or more, meaning you’re only investing $95 out of every $100 you hand over to them.

Even the no-load funds have average expense ratios of 1.3 percent to 1.5 percent, meaning the fund has to beat the market by that amount in order to provide market returns net of fees.

And if the market goes down five percent but the mutual fund only loses four percent, they’re thrilled because they beat the market. Doesn’t matter to them that you are down four percent. But I bet you don’t care that they beat the market, you only care about the four percent that you lost.

There are various reasons why the analysts and fund managers’ performance is so bad. I’ll be sure to follow up on this point in the near future.

But for now, know this: Following the Wall Street pros is usually the worst thing you can do – unless, of course, your goal is to lose money.

Good investing,

Marc Lichtenfeld