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Dividends from overseas

Investors have already started to look overseas for diversification and it's clear why. "More S&P 500 issues are paying a dividend than at any time since December 1999," says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. However, yields in the US are historically lower than in Europe and certainly lag emerging markets.

Indeed, S&P Capital IQ's world equity income league table reveals the UK, Germany and Switzerland are Europe's "income sweet-spot." In fact, the FTSE 100 yields above 4 per cent which, if you strip out the post-credit crunch spike, is higher than it’s been in over 20 years. So, returns are good and there's a reasonable payout ratio, too. And it's no coincidence that the same influential institutions appear on share registers across Europe.

However, just looking at headline rates can be misleading. For Spain, the estimated yield for 2013 is 6.5 per cent, the highest of the major economies, but the payout ratio is 150 per cent. This suggests you are being rewarded for risk, but the likelihood of receiving such a high return is very low indeed and dividend cuts, rather than growth, are more likely.

Further afield, the tiger economies of Asia are fast coming round to the idea of dividends. Attitudes began to change after the Asian financial crisis of the late-90s. Family-owned businesses lost a lot of money and decided the best way to spread their assets more evenly was to pay themselves a dividend and reinvest in property or other assets.

Asia also widens the field in terms of exposure to themes as well. It's much harder getting access to long term growth trends such as dietary change, agriculture and Far East defence spending from the UK, says Mark Whitehead, manager of Sarasin's International Equity Income Fund.

Asian companies tend to have less debt than western counterparts and will enjoy faster growth for a number of years. The IMF expects emerging markets to grow 5.6 per cent in 2013 compared with just 1.5 per cent in advanced economies. Transparency is improving, too, and analysts at S&P Capital IQ see "plenty of room for future emerging market income growth." Consensus forecasts are for a 10 per cent increase in 2013, equivalent to a yield of 3.3 per cent.

See our feature on The World's Best Dividends

 

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