- Many large companies derive significant revenue outside of the U.S.
- International markets offer both growth opportunities and attractive equity yields.
- Investors should consider global dividend funds as part of their current portfolio.
The line between domestic and global securities has blurred. The top constituents by market capitalization of the S&P 500 index include Apple, Exxon Mobil, Microsoft and Johnson & Johnson. The MSCI All Country World Index (MSCI ACWI) — which currently yields around 50 basis points more than the S&P 500 — includes Apple, Exxon Mobil and Microsoft as its top three positions (and Johnson & Johnson is number five). In most cases, these companies derive well over half of their revenue outside of the U.S. Limiting yourself to U.S. based companies doesn’t necessarily protect you from global risk: investors should consider taking the lead of companies they invest in and invest globally in companies with diverse revenue streams.
While problems in Europe or the fiscal cliff in the U.S. remind us that sovereign issues often drive stock prices temporarily, a well-diversified mix of U.S. and International stocks can dampen volatility. Market dislocations can often give investors the opportunity to buy global companies that may derive little revenue from their home country, “on sale.”
With equity yield in high demand in the U.S. thanks to low interest rates, valuations in some sectors of the market are getting elevated. In contrast, non-U.S. stocks can bring lower valuations and attractive yields. At the end of the first quarter of 2013, the top quartile of yield in the S&P 500 provided yields of 2.74% or higher. At the same time, the MSCI ACWI contained 841 (34% of the benchmark) stocks with yields at least that high. In addition, that index has just under 12% exposure to emerging markets where according to HSBC, dividends grew 8.3% from 2004-2011 compared to 4.8% in developed markets.*
Of course, investors must balance sovereign risk with higher growth rates but emerging markets offer an opportunity to participate in the highest growing geographies. And, non-US companies can provide attractively priced high yielding equities. A global dividend fund benchmarked against the MSCI ACWI can provide investors with geographical diversification with attractive valuation and yield. In sum, current conditions make a compelling case for investors to consider global dividend funds as part of their current portfolio.
Related reading: Global dividend-paying equities
*Source: Barron’s Emerging Markets Daily, January 17, 2013.
Equities are affected by stock market fluctuations that occur in response to economic and business developments.
International investing involves increased risk and volatility due to potential political and economic instability, currency fluctuations, and differences in financial reporting and accounting standards and oversight. Risks are particularly significant in emerging markets. Investing in emerging markets may involve greater risks than investing in more developed countries.
It is not possible to invest directly in the unmanaged indices listed below:
The Standard & Poor’s (S&P) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization U.S. stocks.
MSCI All Country World Index index captures large- and mid-cap representation across 24 Developed and 21 Emerging Markets countries.