10 top foreign investments for your portfolio
Investors looking for reliable sources of income don't have to confine themselves to the UK. There are plenty of foreign companies sporting hefty and sustainable dividends, and private investors can access them either as individual stocks or as funds.
Some of the highest yields are among eurozone companies, and this is where the troubles of the currency bloc both help and hinder the process of getting good value. A quick look over European stock screeners and high-yield tables reveals that banks, energy and telecom companies sit right at the top of the payout lists, and there are real worries about the sustainability of some dividends.
That Crédit Agricole, for example, with hefty exposure to Greece through Emporiki Bank, should sport an indicated yield of more than 12% perhaps isn't surprising. Anyone buying the shares would be diving in when a cut in payout is already being priced in, as the stock has fallen 80% since 2007. Though that jaundiced view may not be fully justified, investing in banks like Crédit Agricole is plainly speculative. The same could be said of Santander, Spain's biggest and supposedly strongest bank. The yield is over 11%, but bad debt provisions have soared and the bank's core capital ratio may be insufficient.
Ian Richards, head of equity strategy at BNP Paribas, emphasises that investors shouldn't just look at the highest raw yields, but aim to seek out those that were affordable and could grow. "You have to combine dividend yield with underlying growth in cash flow. We particularly favour distressed European companies with overseas income streams, in areas such as industrials. pharmaceuticals is our favourite non-cyclical sector."
Energy utilities across Europe have been through the wringer in recent years too. Slowing demand, increased costs for green energy and carbon credit have all contributed, and the eurozone crisis makes it more expensive for them to raise capital.
It takes a little more thought to see why telecom companies such as Dutch KPN, Spain's Telefonica and France Telecom are offering double-digit yields. There is no doubt that Europeans will continue to make phone calls and use the internet, and although these companies are plainly utilities, what could the trouble be?
There are several fears. The first is, again, that the eurozone crisis will make it tougher for them to raise capital to fund expansion. The second is that regulatory pressures will intensify, hitting margins; and the third, and most extreme scenario, is that financially embattled governments may be tempted to raid these steady cash-generative companies for taxes to help balance the books.
Despite all that, steering clear of the most troubled companies leaves plenty of good solid firms that, for all but the most extreme eurozone scenarios, are underpriced.
Here are 10 that investors may wish to give a second look, including three from the US for those who prefer to avoid eurozone exposure altogether.
1. Deutsche Telekom
Germany's dominant phone provider topped profit forecasts and reaffirmed full-year guidance with its recent results reported in May. With a forward price/earnings ratio (p/e) of 13.5, it is one of the more expensive European stocks in the sector, reflecting the strength of the economy from which it garners most of its profits, but the dividend yield of 8.8%, though not fully covered by forecast earnings, is tasty.
Telefonica, the only Spanish company in this list, is also one of the trickiest. The 12.4% yield shouldn't be taken too seriously as a projection for the future given the encroaching debt burden and shrinking profits.
However, all the bad news is firmly in a price that has fallen by 40% in the past year. Telefonica is a major force in booming Latin America, as well as the most solid utility Spain has to offer. With Spain's banks now being rescued separately from government finances, there is plenty of scope for a rebound.
Belgium's main telecoms provider, which is majority owned by the state, beat expectations with its latest results and reversed a decline in its consumer division by attracting more customers and pushing through price rises. Though not one of Europe's giants, the company is a stable operator, and the dividend has been affirmed for this year.
4. Wolters Kluwer
Dutch-based tax, health and legal journal publisher Wolters Kluwer is a former growth star, but even in these straitened times when growth has been harder to find, it is a highly defensive investment.
The dividend yield of 5.3% may not be as high as some, but the company continues to build earnings per share (EPS) despite a de-rating over the past five years.
5. Total SA
A powerful oil company, Total has just the kind of dividend that BP used to boast. Its performance has been solid if not spectacular, and there is now an expectation that refining margins will improve with the recent weakness in crude prices. A broad spread of international activities and the essential nature of its product provide good cover against eurozone woes.
The world's fourth-largest drug company may be in the process of cutting jobs, but taking an axe to costs is essential. The company has been ahead of analyst estimates in each of the past five quarters, and its dividend, though one of the lowest in our selection, is 1.6 times covered by earnings, and has plenty of growth potential.
Germany's pre-eminent engineer is doing well in China and in plenty of other places too, aided by the weak euro. Though the latest results were damaged by one-off charges, the company's strength and resilience should not be underestimated as shown by its improving cash flows. The yield may not be high in absolute terms, but combined with growth prospects make an attractive combination.
8. Kinder Morgan Energy Partners
This may not be a household name, but KMEP is both a growth and income play. The firm is one of the largest gas and oil pipeline firms in the world, owning 71,000 miles of pipes, which the shale gas and tight oil booms are keeping well filled.
Best known as Philip Morris, owner of Marlboro cigarettes, Altria has a broader spread of businesses including wineries, that have all contributed to a consistent high single-digit growth in EPS. The dividend has been consistently increased too, and there have been numerous repurchases of shares. It's a sin stock, of course, but one of the best.
10. Eli Lilly
Pharmaceutical firm Eli Lilly, developer of Prozac, is one of a number of solid defensive US drug firms, and boasts probably the best payout. It has overcome the expiry of the US patent of its depression drug Zyprexa, although that will continue to hit reported results for some time.
This article was written for our sister publication Money Observer.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.