U.S. equities have risen to all-time highs, forcing bargain hunters to look abroad where solid companies have lower valuations than their U.S. counterparts.
A pickup in business loans and an ongoing European Central Bank asset purchase program are fueling optimism in Europe, even though economic recovery there hasn’t been as robust as in the United States, says Sean O’Hara, director with Pacer Financial. Because it’s early in the economic cycle, there’s room for growth, he says.
“The recovery in European stocks only really started this year,” says Chris Bertelsen, chief investment officer with Aviance Capital Management.
Although European companies are rebounding, their forward price-earnings ratios remain at discounts to similar companies in the U.S., says Brian Hennessey, a portfolio manager with Alpine Woods Capital Investors.
“That’s a bit of a disconnect and an opportunity,” he says.
One reason international stocks trade at a discount is that many U.S. investors mistakenly believe that domestic companies are the only good place to invest because of their growth prospects and cash positions, Hennessey says.
U.S. stocks have been so strong that investors probably resist taking on additional risk by going abroad, he adds. “Investors have gotten so used to finding everything they need in the U.S.,” he says.
International dividend stocks also show less volatility than those in the U.S., Bertelsen says.
As commodities such as oil have bounced back from low prices, emerging market countries with commodity-centric economies have also been rebounding, notes Jeremy Bryan, a portfolio manager with Gradient Investments.
[See: Oil ETFs: 8 Ways to Invest in Black Gold.]
Chinese economic growth is also picking back up, he says.
Bryan likes dividend-paying stocks that offer both yield and the potential for share price appreciation. That approach often leads his firm to large-cap stocks. These companies pay consistent dividends and can sell at a discount simply because they are based outside the United States, he says.
“We wanted to have both that growth and income, but we also wanted to be in the high-quality blue-chip-type stocks,” he says.
Bryan notes some differences between international dividend stocks and their U.S. counterparts.
International companies often pay dividends semi-annually or annually whereas U.S. companies usually pay quarterly, he says, adding that certain countries withhold taxes on the dividends foreign investors earn.
For investors interested in international dividend stocks, here are some of our experts’ top picks:
BP (ticker: BP). Yielding more than 6 percent, BP’s dividend is larger than that of U.S.-based Chevron Corp. ( CVX) and Exxon Mobile Corp. ( XOM). BP generates similar cash flow as those two competitors, Bryan says. Even with an already superior yield BP should at least maintain and probably increase its dividend over time, he says.
[See: 10 Skills the Best Investors Have.]
China Mobile (CHL). For an emerging market pick, Bryan likes China Mobile. The company is working on deploying a 5G network. That, coupled with iPhone sales, gives Bryan hopes for this company’s long-term growth prospects. He also thinks the stock is a bargain thanks to a recent decline in price . Because of China’s huge population, the company has a quality balance sheet and generates “phenomenal” cash flow, he says. China Mobile yields 2.7 percent.
Nestle (NSRGY). Bryan likes this company for its long-term stable growth and its track record for executing its plans. The shares are not the cheapest, but the premium is worth it considering “it’s among the highest-quality companies in the world,” he says. O’Hara also likes Nestle because its free cash flow is above average and the company makes smart acquisitions of brands. The stock yields 2.7 percent.
Nokia (NOK). Hennessey believes this company is a turnaround story in the making . “It’s been a hated name for years,” he says. But that just means now is the time to invest before others get on board as Nokia improves, he says. Until it gains more traction, Nokia probably won’t be able to boost its dividend of 3 percent. Still, Hennessey thinks the company has a decent amount of cash and will soon be able to free up cash flow it has been plowing back into the company.
Banco Bilbao Vizcaya Argentaria (BBVA). Hennessey predicts earnings at this Spain-based bank will grow at a healthy rate over the next few years, potentially leading to higher dividends. “They’re a pretty well-capitalized bank,” he says. One reason he thinks the bank’s shares have room to grow is because peers in Mexico, Spain, South America, Turkey and the U.S. are trading at price-earnings premiums to BBVA. The bank should also benefit as interest rates rise in Europe, which Hennessey thinks will happen next year. BBVA yields 7. percent.
Vodafone Group (VOD). The telecom sector has a concentration of companies with stable cash flow and strong potential for increasing dividends given that smartphones and data usage are here to stay, Bertelsen says. Yielding a hefty 7.7 percent, Vodafone remains attractive even though its share price appreciated recently after investors realized the company has the cash and the capability to expand in Europe, he says. He thinks nearly all private telecom businesses will enjoy virtually guaranteed cash flow, especially if they have little competition. This is true for Vodafone, he says. “People pay their cellphone bills before they pay their mortgages,” he says.
[Read: How to Invest in the Evolving Telecom Sector.]
Novartis (NVS). This health care company stands to benefit from aging baby boomers in the U.S. and new delivery methods in developing nations that will give more people access to medicine than before, O’Hara says. Yielding 3.4 percent, this global behemoth has good brands and should be able to weather economic slumps, he says.
More from U.S. News
7 Great Ways to Invest in Cuba
10 Ways to Invest in Pharmaceuticals With ETFs
7 ETFs for a Solid Portfolio Defense
7 Top Foreign Dividend-Paying Stocks originally appeared on usnews.com
