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Finding Fatter Yields Abroad: SDY vs. FGD

Stocks in this article: SDY FGD IDV LVL DOO DEM

NEW YORK ( TheStreet) -- Desperate for yield, investors have been pouring into dividend ETFs. A popular choice is SPDR S&P Dividend (SDY), which yields 2.9%. But you can get richer yields with foreign dividend funds. First Trust Dow Jones Global Select Dividend (FGD) yields 5.7%, while iShares Dow Jones International Select Dividend (IDV) yields 5.4%.

Foreign stocks have long yielded more than their U.S. counterparts. The gap developed over decades because Wall Street did not focus on dividends. Instead of insisting that companies use cash for dividends, many institutional investors urged corporate managements to reinvest in their businesses or buy back shares.

Foreigners had a different attitude. In Europe and the emerging markets, many companies have been dominated by founding families that preferred receiving hefty dividends.

In recent years, U.S. stocks have been increasing their dividend payouts, but they still trail foreigners by a substantial margin. While U.S. shares account for 47% of the value of global stock markets, American companies only pay 29% of all dividends, says Jeremy Schwartz, research director of Wisdom Tree Asset Management.

Besides offering extra income, international dividend funds can provide diversification because of their exposure to foreign currencies. When the dollar sinks against the euro -- as happened in recent months -- the value of foreign stocks climbs for U.S. investors.

Should income investors dump all their U.S. funds and shift to foreign ETFs? Not necessarily. If the euro collapses, the value of foreign funds could sink. Still, dividend investors have considerable reason to put at least some assets in foreign ETFs.

Among the highest yielding foreign ETFs is Guggenheim S&P Global Dividend Opportunities Index (LVL), which yields 7.8%. The fund holds 100 high-yielding companies that have increased earnings during the past three years and have reported stable or rising dividends. About two thirds of assets are in mid-cap and small stocks.

Because dividend stocks tend to be relatively stable, the Guggenheim portfolio is less volatile than many competitors that include nondividend stocks. But like many dividend funds, Guggenheim fell hard during the turmoil of 2008. Part of the problem was that banks and other financial stocks are among the biggest dividend payers. Financials account for 28% of Guggenheim's assets. As the financial crisis unfolded, bank stocks collapsed.

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