Investing in dividend-paying stocks is a strategy that is truly tried and tested. According to data from a report published by JPMorgan in May of 2013, companies with a dividend policy returned an average of 9.5% in comparison to an average return of 1.6% from companies that did not pay dividends from 1972 to 2012. This difference between the performance of these two categories of stocks adds up to a massive dollar amount for the entire period of 40 years, as depicted below.
The U.S. markets have gained staggering amounts in the last 10 years, and many indexes are at or near all-time highs. While this performance has helped investors generate stellar returns from their investments, shopping for income stocks has become increasingly difficult along with declining dividend yields, as illustrated below.
As we step into 2020, a year that will most likely provide more capital gains to investors, selecting income stocks will continue to prove challenging. In this analysis, we will discuss the importance of shopping for high yield bargains outside the U.S. and introduce two companies worth investing in.
Foreign markets provide better and safer yields
The U.S. stock markets have outperformed global peers by a healthy margin in the last five years, meaning that there is every possibility that American stocks might be relatively overvalued.
Source: Yahoo Finance
This underperformance of markets outside the U.S. is one of the primary reasons behind the relatively high dividend yield of these markets. The below graph plots the dividend yields of countries across the world as of Dec. 24, 2019 (major indexes in the respective regions were used to calculate the yields).
Source: Bespoke Investment Group
As evident from the above illustration, many countries outside America currently provide much higher yields, and investors should take notice of this. More importantly, the majority of these markets are trading at attractive earnings multiples, which is depicted in the below table.
| Country/region | Price-to-earnings multiple |
| The United States | 18.5 |
| The United Kingdom | 13.1 |
| Japan | 14.6 |
| Australia | 17.5 |
| Brazil | 12.9 |
| Canada | 14.5 |
| China | 12.1 |
| France | 14.8 |
| Germany | 14.1 |
| India | 18.9 |
Source: Yardeni Research
In conclusion, there are foreign markets that are relatively undervalued compared to the U.S., providing attractive income returns to investors. This is an opportunity to tap into in 2020. In the remainder of this analysis, I will introduce two overseas companies to income investors.
China Mobile Limited
China Mobile Limited (CHL, Financial) is the world’s largest telecommunications company by the number of users (935 million active users as of June 2019) and provides its services in both Mainland China and Hong Kong. The company is one of the frontrunners in launching the 5G technology in Asia and according to an investor presentation released in July of 2019, China Mobile has already planned to roll out this technology in 50 cities by early 2020. As a state-owned company, China Mobile has the backing of the Chinese government to execute the massive investments that are required to introduce advanced technologies such as 5G.
Due to the compression of profit margins, the company has not been able to translate the revenue growth in the last 10 years to an increase in the net income. This was also one of the primary reasons behind the disappointing performance of its shares. Geopolitical tensions, especially the trade war between the U.S. and China, also played a part in deteriorating investor confidence in China Mobile’s ability to thrive.
Share price performance in the last 5 years
Source: GuruFocus
This decline has pushed the dividend yield to 4.5% at the market price of around $41.37 on Jan. 6. As confirmed last July, the company has a target payout ratio of 49%, which leaves more than 50% of company earnings available for investment-related activities. What stands out the most is that China Mobile generates billions of dollars in free cash flow, more than major telecommunication giants in the U.S. This is an indication of the cash-rich nature of the business, and beyond 2022, when 5G-related investments are expected to decline, the company might increase its dividend payout as the massive scale of the company leaves them with little growth opportunities to invest in.
Free cash flow comparison
Source: GuruFocus
The secular decline in the share price has brought down the earnings multiple of China Mobile shares as well, which are currently trading at a forward price-earnings ratio of 10.8. This is below the historical average multiples at which the shares have traded in the last decade, meaning that the company is likely undervalued.
Source: GuruFocus
China Mobile looks to be a great income play for investors willing to diversify their portfolios across borders. The growth opportunities the company is tapping into will help stabilize revenue and earnings in the future, and the healthy free cash flow position and the low payout provides a margin of safety for investors.
Royal Dutch Shell plc
There are many reasons to believe that the global economy will continue growing in 2020, especially considering the imminent success of the Phase 1 trade deal between the U.S. and China. This is good news for energy companies around the world.
Royal Dutch Shell plc (RDS.A, Financial) is one of the leading oil and gas integrated companies in the world and is headquartered in the United Kingdom.
The dividend policy of the company dates back to 2004 and shares yield a very attractive 6.4% at the market price of around $61 as of Jan. 6. As the below chart illustrates, the company has been able to cover its dividends with free cash flow in the last couple of years, which is a promising sign for investors as this has rarely occurred in the last 10 years.
Source: GuruFocus
Royal Dutch Shell has introduced a plan to develop its asset portfolio to ensure the sustainability of its earnings in the future. According to the findings of the International Energy Agency, the demand for renewable energy sources will grow by 50% in the next five years, and the company is in a good position to benefit from this emerging trend as well. From 2021-2025, Royal Dutch Shell plans to spend an average of $30 billion per year to improve its assets in order to tackle this opportunity and bring in more revenue from its core businesses.
Source: Third-quarter investor presentation
As per the guidelines provided by the management, these investments will help the return on capital employed (ROCE) to reach 12% by 2025, which would mark a significant improvement from the current level of around 8%. This is a positive sign for investors as the company would be in a much better financial position to increase shareholder distributions in the future.
With a covered dividend and an attractive growth profile resulting from planned investments, Royal Dutch Shell is an overseas company that should get the attention of income investors in 2020.
Takeaway
Income investors might find it difficult to bag some bargains in 2020 as American markets continue to soar. Yields will naturally decline as stock prices rise to new heights. However, the story outside the U.S. is a complete contrast. Global markets have lagged behind U.S. markets in the last five years and are now trading with higher yields and at better valuation multiples, which are both reasons to consider investing in equities outside of America. China Mobile and Royal Dutch Shell are two companies that stand out, but not every investor would feel comfortable with researching and investing in foreign companies. The ideal solution for such investors is to invest through an exchange-traded fund (ETF). Some of the most popular options are listed below, along with their respective dividend yields as of Jan. 7, 2020.
| Fund | Yield |
| SPDR S&P International Dividend ETF (DWX, Financial) | 4.41% |
| Invesco S&P Global Dividend Opportunities Index ETF (LVL, Financial) | 3.41% |
| Global X SuperDividend ETF (SDIV, Financial) | 8.28% |
Source: Reuters data
Income investors should still be able to find attractive American companies to invest in as well, but it may be a better idea to diversify into global stocks in preparation for potential outperformance of markets outside the U.S. in 2020.
Disclosure: I do not own any stocks mentioned in this article.
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