International blue-chip dividend stocks have become more attractive as values of their U.S. counterparts have risen with the continued bull market in domestic equities.
While the U.S. is showing economic growth, worries have persisted about economic and political issues in Europe and Asia.
Amid the outperformance of domestic equities, many investors have bulked up on U.S. stocks and may now be overweight in the category, leaving opportunities for investors to look for bargains in strong overseas names that may be facing headwinds.
[See: The 25 Best Blue-Chip Stocks to buy for 2017.]
In general, the price-earnings ratios of dividend payers in the U.S. are historically high, says Christian Magoon, CEO of Amplify Investments. “That definitely is not the case for international dividend payers,” he says.
Jeremy Bryan, portfolio manager at Gradient Investments, sees the opportunity to shift money from U.S. equities — in which some investors may now be overweight — into international equities that may be undervalued.
Blue-chip international dividend payers tend to be less expensive than their U.S. counterparts because of international risks such as concerns over Britain’s decision to leave the European Union and worries that upcoming elections in France may lead to that country also leaving the bloc, Magoon says.
In Asia, there are concerns about slowing economic growth in China, he says, while Bryan points to worries about Japan’s economy and its aging population.
In addition to political and economic headwinds abroad, currency risk has made international blue-chips less expensive, Magoon says. The stronger U.S. dollar is a drag on their income, he says.
Despite the headwinds, Magoon notes that the risks are mostly economic and geopolitical instead of individual company risks.
He thinks “unloved” international stocks are worth pursuing as a way of diversifying portfolios and giving investors a chance to buy low and sell high.
Over the last decade, the U.S. has outperformed international stocks, and that is especially true since 2013 when the economy demonstrated it was in growth mode, Bryan says. This has led many investors to become U.S.-centric and their portfolios to become underweight on non-U.S. securities, he says, adding that the pendulum is starting to shift and international stocks will become more of a focus.
[See: 9 Blue-Chip Powerhouse ETFs to Buy.]
With this in mind, Gradient created its actively managed international stock portfolio to put investors into leading companies abroad with a history of paying dividends, stable and consistent earnings growth and dividend growth over time, Bryan says.
Gradient screens for companies that are able to pay their dividends and still have enough cash flow to reinvest in themselves, he says.
Companies included in the portfolio are such international heavyweights like Siemens, Toyota Motor Corp. (ticker: TM), Nestle, Sanofi ( SNY) and Kimberly-Clark of Mexico, he says.
Magoon says investors should have international stocks to diversify their portfolios, and within their international holdings they should have a blend of dividend growth and high-yield dividend names.
One way investors can gain exposure to international dividend stocks is through the iShares International Select Dividend exchange-traded fund ( IDV), which offers a selection of high quality international companies with a history of paying dividends, Magoon says.
Another is the ProShares MSCI EAFE Dividend Growers ETF ( EFAD), he says.
While yields for dividend growers will be lower than for companies focused on paying the largest dividends, Magoon believes that dividend growth stocks will perform better if economies shift to a rising interest rate or inflationary environment.
That’s because they have room to grow their dividends on pace with — or even faster than — inflation and rates, while those which focus on paying the biggest dividend possible may not, he says.
Buying international stocks is also a good way to diversify interest rate risk, says Jay Jacobs, director of research with Global X Management Co.
U.S. blue-chips such as utility, consumer staples and telecom companies will be sensitive to domestic interest rate movements, he says. To spread out that risk, investors can look for exposure to those types of companies in Europe and Japan where interest rates remain flat, he says.
[See: The 10 Best Dividend Stocks of 2016.]
An option to do this is through Global X’s MSCI SuperDividend EAFE ETF ( EFAS), which invests in high dividend international equities, Jacobs says.
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How Global Blue-Chip Stocks May Balance Portfolios originally appeared on usnews.com
