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(GE's dividend increase announcement added in this update)
TheStreet) -- Investors have been told to seek the safety of boring U.S. stocks with predictable businesses and attractive dividends to protect their money from Europe's debt meltdown and slowing U.S. economic growth.
That strategy isn't bulletproof.
DuPont(DD - Get Report), the U.S. chemical maker that's a member of the
Dow Jones Industrial Average, saw its shares plummet as much as 7% today after the company cut its full-year profit forecast.
DuPont's big 3.5% dividend yield is doing little to cushion the blow. Investors are now wondering whether there's any U.S. equity class that can help shelter them from a downturn. DuPont's CEO is blaming slower growth on "global economic uncertainty," the same thing investors were looking to avoid.
DuPont wasn't alone in slashing its forecast. Chipmakers
Texas Instruments(TXN) and
Altera(ALTR) as well as Japanese carmaker
Toyota(TM), though not all big dividend payers, also said profits would be lower than originally thought.
The question for investors now is, are U.S. large-cap dividend-paying stocks really the best place to be in 2012? Is the attractiveness of a dividend income stream worth the potential pain that results from a drop in share price?
Job Curtis, manager of the
Henderson Global Equity Income Fund(HFQAX), understands why risk-averse investors have been brainwashed into believing U.S. large-cap stocks with big dividends are the best place to be.
"Investors tend to favor their own markets, and the U.S. has loads of good companies," Curtis says from his London office. "But even the large U.S. companies are multinationals. You can find comparable companies in global markets."
As he's based in Europe, Curtis knows that investors are certainly capable of finding better yields outside of the U.S. He says markets outside the U.S. tend to yield more, noting that the average yield across Europe is about 4%. He also says investors could even find yield across the Pacific Ocean in Asia.
"There is an interesting opportunity in Europe because of the sovereign debt crisis," Curtis says. "There has been some wide-scale selling across Europe which has left companies looking very attractive. These are global businesses sold off along with the rest of Europe. You have some outstanding companies with long dividend growth records. We're seeing good dividend growth."
For example, DuPont has a 3.5% dividend yield, one-year revenue growth of about 20% and a forward price-to-earnings ratio of 10. To a U.S. investor, that may sound like an attractive opportunity. But in Europe, German chemical company
BASF has a lower P/E ratio, one-year revenue growth of 26%, and a dividend yield above 4%.
Curtis, meanwhile, has several European stocks with strong dividends that he says U.S. investors should consider over very similar U.S. counterparts. Curtis' fund, which celebrated its fifth anniversary last month, currently has a 12-month yield of 7.5% and passed $1 billion in assets this year. His winning approach has been simple: Buy stocks with above-average yields and growing payments.
"You could be in a lot of value traps if you're hunting for high yields, as those dividends could be cut," Curtis warns. "You want companies that generate cash. Paying a dividend is good corporate discipline. We have stocks with yields better than their 5-year corporate bonds. I think equities, particularly those outside the U.S., offer an attractive yield, you get ownership in a company, and you can take advantage of long-term growth."
Three of Curtis' European stocks picks are detailed below and on the following page. A comparison of dividend yields and valuation to other U.S. stocks and Asian companies is included for each.
Siemens AG(SI)Company Profile: Based in Germany, Siemens AG is a global conglomerate with operations in energy, healthcare, transportation and industrials.
Key Statistics: 4.1% dividend yield, forward P/E of 8.6, one-year revenue growth of 6.6%
Consider in Place of:
General Electric(GE - Get Report),
United Technologies(UTX)Curtis' Take: Curtis says that Siemens is a lot like GE but without the financial services, a unit that gave GE a major headache during the 2008 financial collapse. While the company is based in Germany, Siemens is truly a global business, he says.
"It's listed in Europe, but 50% of its sales are derived from outside of Europe," Curtis says. "They're big in turbines, which is a growth area. It has a strong balance sheet, which is a comfort to me. It is a cyclical stock and a bellwether industrial company. It's dividend growth was very strong last year, so going forward it will be more regular growth."
Curtis adds that the company pays a dividend annually and is set to go ex-dividend in January, which makes the stock an attractive opportunity now. Siemens AG's yield of 4.1% overshadows a 4% yield for GE. On Friday, GE announced an increase of dividend, which pushed the yield from 3.7% to 4%.
Siemens AG's yield also beat the 2.6% yield for United Technologies and 2.8% for Honeywell, both large U.S. industrial giants. Curtis says his fund owns shares issued in Germany, but notes that U.S. investors are able to buy American Depositary Receipts.
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