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Get Fat Yields With Foreign Dividend Funds

Stocks in this article: FFINX DLS DGS GDIIX

NEW YORK ( TheStreet) -- Hungry for reliable income, investors have been embracing dividend-paying blue-chips. Plenty of solid utilities and consumer companies yield 3%. That seems like a rich payout at a time when 10-year Treasuries yield 2.0%.

But to get an even higher yield, consider funds that focus on foreign dividend stocks. Many foreign blue-chips yield more than 4%. Forward International Dividend (FFINX), a mutual fund, yields 5.9%.

Besides paying higher yields, foreign dividend payers tend to be cheaper than their U.S. counterparts. While the S&P 500 has a forward price-to-earnings ratio of 13, the stocks in the Forward fund have a P/E of 8.6.

Foreign small-cap funds can be attractive. WisdomTree International SmallCap Dividend (DLS), an exchange-traded fund, yields 3.8% and has P/E of 11. In comparison, the Russell 2000 small-cap index yields 1.4% and has a P/E of 17.

Foreign stocks have traditionally paid higher yields than their U.S. counterparts. Investors in many countries have preferred fat dividends, and companies have paid out relatively large amounts of their earnings.

But these days, the foreign yields are especially rich because the stocks are out of favor. At a time when debt problems plague Europe and Japan, many foreign economies are struggling, and the markets are depressed. As share prices fall, dividend yields rise.

To find the best dividend payers, Forward International portfolio manager David Ruff considers stocks of all sizes that yield more than 2%. The companies must have strong earnings and the ability to increase dividends at double-digit annual rates.

Ruff pays close attention to the dividend payout rate, which is the percentage of earnings that goes to cover the dividend. He typically prefers stocks with payout rates of 30% to 60%.

When the payout rate is lower, Ruff worries that management is not committed to paying dividends consistently and could spend extra cash on reckless acquisitions. Companies with high payout ratios could be on shaky ground.

"If the payout rate is 95%, then there is not much room to increase the dividend in the future," he says.

A big holding in the fund is Unilever (UN), the Dutch maker of Lipton tea and Hellmann's mayonnaise. The stock yields 3%. Another holding is Sanofi (SNY), a French drugmaker that yields 4.7%.

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