(GE's dividend increase announcement added in this update)
) -- 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.
, 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
as well as Japanese carmaker
, 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
, 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
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."
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.
: Based in Germany, Siemens AG is a global conglomerate with operations in energy, healthcare, transportation and industrials.
: 4.1% dividend yield, forward P/E of 8.6, one-year revenue growth of 6.6%
Consider in Place of
: 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.
: Unilever is a multinational consumer-products maker. The company's portfolio of brands includes Lipton, Dove, Ben & Jerry's, Q-Tips, Suave, Degree, and Klondike, among many others.
: 3.7% dividend yield, forward P/E of 14.3, one-year revenue growth of 11%
Consider in Place of
Procter & Gamble
Johnson & Johnson
: Curtis says this food and household products company truly is global, noting that emerging markets account for 53% of group sales. Even more impressive, Curtis says that those emerging markets sales are growing 10% per year.
"These are products that will be bought by people who have pulled themselves out of poverty in emerging markets," Curtis says. "This stock has underperformed its potential on a longer-term basis, but they are improving innovation of products. What I like is the footprint in the emerging markets. At 14.6 times earnings, it's not completely cheap but it's a stable industry."
Unilever's 3.7% yield outpaces the yield of U.S. counterparts like P&G (3.3%), J&J (3.6%), Colgate-Palmolive (2.6%) and even multinational beverage makers like
(2.8%). Curtis says his fund owns shares issued in Europe, but adds that U.S. investors are able to buy American Depositary Receipts.
Royal Dutch Shell
: 4.8% dividend yield, trailing P/E of 7.1, one-year revenue growth of 32%
Consider in Place of
: Curtis notes that Royal Dutch is the second biggest oil company in the world only to Exxon, and it's even ahead of Exxon in terms of the gas business. Royal Dutch Shell doesn't get the same attention from dividend investors that Exxon or Chevron do, but that's likely because Royal Dutch hasn't grown their dividend in the last year. That may be about to change, Curtis says.
"They've been investing in recent years in technologically difficult long-life assets, like liquid natural gas in Qatar and Canadian oilsands. These are major projects with long lives," Curtis says. "They haven't grown the dividend for the last year since they've been spending on capex, but they haven't cut the dividend since World War II. These are just coming into production, so there will be a big boost to operating cash flow going forward. With the projects coming on stream, the dividend could start growing again within the next year."
Royal Dutch Shell, which trades on U.S. stock exchanges, has a dividend yield (4.8%) that is more than double Exxon Mobil (2.3%) and is also higher than Chevron (3.2%) and ConocoPhillips (3.7%).
>>To see these stocks in action, visit the
portfolio on Stockpickr.
-- Written by Robert Holmes in Boston
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