The numbers are in, and it turns out that 2009 was a record-breaking year for dividend investors. But some records don't warrant celebration. According to an analysis by Standard & Poor's of about 7,000 domestic companies, dividend cuts cost investors in U.S. stocks somewhere in the neighborhood of $58 billion in 2009. S&P says that 804 U.S. companies decreased their dividends last year, up from just 110 in 2007. Meanwhile, 1,191 domestic companies increased their payouts, compared with 1,874 in 2008 and 2,513 in 2007. All told, according to Standard and Poor's, 2009 was the worst year for U.S. dividends since the company began tracking them in 1955.
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In this climate, if you're wondering where the dividends are, you're hardly alone. But if you're willing to hunt for them, there are plenty of pockets internationally where dividend payouts remain relatively strong. U.S. News spoke with David Ruff, a comanager of Forward International Equity Fund, about dividend opportunities abroad. In 2009, Ruff's fund gained 36 percent. Excerpts of our discussion:
What's your broad philosophy on dividends?
It's not typically the highest dividend yielding stocks that provide the best total return over the full market cycle. It's usually in the sixth, seventh, and eighth deciles, with the tenth decile being the highest dividend yielding stocks and the first decile being the nondividend-paying stocks. You want the dividend payers but not the ultrahigh dividend paying stocks. The key characteristic, we think, is the combination of an attractive dividend yield but also a lower payout ratio. We're not interested in companies that have a dividend payout policy such that they're paying out 80 or 90 percent, or, in some cases, they're not even earning their dividend. There's not enough money for them to reinvest in their business and grow their dividend over time.
What European companies do you like for dividends?
Most of our work is done on a bottom-up basis, and then at the last step we consider the country risk factors, the balance of payments, the currency reserve situation, the fiscal and trade deficit numbers. … But with that said, the portfolio does have a structure that is heavily invested in Switzerland relative to our index and most of the international indexes. In terms of Eastern Europe, we think that Turkey is in a better situation than most of Eastern Europe is as a bloc. It has somewhat been painted with the same brush as Latvia and Estonia and Hungary, and we don't think that's fair. We think that Turkey is in much better shape, and we have several individual stocks that are Turkey-based. And we think that they're going to provide better-than-market appreciation potential along with very attractive dividends.
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What are some specific names that you own in Turkey?
We have a smaller cement company, Adana Cimento, which is a very strong company in terms of their balance sheet. … I think that the earthquake that happened more than a decade ago [in Turkey] and the loss of lives indicated that inadequate building materials and bad construction practices are not just something to look the other way at any more—that they actually cost lives. So there is a new attitude toward improving their infrastructure, and Adana Cimento is ideally situated for that. So we think that is an unrecognized opportunity. They pay a dividend once a year, and they've been very consistent in paying it. … Earlier in 2009, when the financial markets were getting pounded, the company had a 30 percent dividend yield. But it wasn't a company that was going to go away. Often times when you see a dividend yield that high, it's because the company is suffering under financial duress and there's an issue of solvency. But that wasn't the case with that company. Another name in Turkey is Anadolu Hayat, which is a finance stock.
How about Switzerland?
We have a couple of the healthcare names. We also have a materials name, Syngenta. Syngenta is a company that makes crop protection products, and I think that it's a company that is ideally situated to participate in the global growth of agriculture. … And there are just a few major players: You have Monsanto, you have Syngenta. So the competition is not as severe as it is in some other industries.
What about Asian companies?
We have a pretty good allocation to Hong Kong at the moment. … One name that is Hong Kong-based but has a significant portion of its revenues from the U.S. is VTech Holdings. … Their major business is cordless phones, and they are the sole providers of cordless phones to AT&T as well as Deutsche Telekom. … They're also a provider of electronic learning products. They're the No. 1 global provider in that space and No. 2 in the U.S. behind LeapFrog.
In the United States, financial companies have had substantial difficulties in paying dividends. What are your feelings about financial stocks abroad?
Financials are the largest weight in our fund at the moment. We have about 27 percent in financials. There is quite an opportunity in terms of selecting dividend payers internationally in the financial sector, so it's not a sector necessarily that you need to shy away from.
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