The Pros and Cons of International Dividend Stocks

In today’s volatile market environment, a lot of investors are turning to dividend stocks. They have increased in popularity as the stock market has tumbled, in part because they offer some indication of corporate management’s confidence in the future of the business.

However, the stocks that pay the biggest dividends may be outside the United States.

To start, the international equity markets provide a broader universe of high-dividend-yielding stocks. While there are 116 U.S. stocks with market capitalizations greater than $1 billion that have dividend yields greater than 5%, 530 international stocks met those criteria as of Aug. 31, 2010, according to Morningstar.

Moreover, many foreign companies pay bigger dividends than U.S. companies do. That’s because a number of foreign countries, both developed and emerging, have a more dividend-friendly culture that encourages paying cash to shareholders rather than keeping it as retained earnings and reinvesting it in the business.

One way to take advantage of the potential for higher dividends abroad is to invest in an international equity mutual fund that emphasizes income.

Keep in mind, however, that there are downsides to investing internationally, including less transparent markets and currency fluctuations. Moreover, many foreign companies link their dividends to a percentage of their earnings, so dividends can fall when earnings do.