How to get a portfolio of foreign stocks with a 4% return

It’s surprisingly easy to get exposure to international stocks through ADRs.

Do you want income? Look abroad. A wide range of high-yield blue chips is offered abroad, especially in Europe: companies like Credit Suisse Group, Sanofi

SNY
and HSBC Holdings is making good payments to its shareholders.

Most of these large company stocks are very accessible to US investors. They are negotiating here in the form of ADR.

The American Depositary Receipt is a wonderful invention that facilitates cosmopolitan investing. An ADR manager, usually a large bank, holds foreign securities in an electronic safe and issues ADR claims against them. The bank converts dividends paid in foreign currencies into dollars and sends those dollars to your brokerage account. When you buy or sell ADR, your transaction is carried out in dollars.

There are thousands of ADRs, most of them traded over-the-counter. But 355 of them are on the Nasdaq or the New York Stock Exchange. These listed ADRs are often very liquid. Meaning: When you want to go in or out, you are faced with a tolerable gap between the offered and asking prices.

The table displays publicly traded ADRs of companies with a market value of over $ 5 billion and dividend yields at least double the 1.3% available on the average national stock. If you bought the bundle, you would have a starting yield of 4% and a reasonable expectation that the collective payout will increase over time. That is, you would expect that any dividend cut in disappointing companies, of which there will undoubtedly be several, will be overshadowed by dividend increases in others.

For this shopping list, I eliminated companies with a current dividend above 70% of average expected earnings over the three-year period 2020-2022. BHP Group, the ore miner, didn’t make the cut: its dividend of $ 6 (on an ADR of $ 58) is attractive but on shaky ground. You can use your broker’s stock selection tool to create your own rules, trading current yield for a growth prospect.

Why are so many foreign companies showing big returns? Because they land in the slow growing but cheap value bucket. Europe, an economically sleepy place, has more than its share of value stocks. Morningstar informs us that the average price / earnings ratio of Vanguard’s European index fund is 15.6. The P / E of the Vanguard fund covering the entire US stock market is 21.4.

So far in this century, the place to make money has been the high-growth, tech-dominated US market. But maybe investors have exaggerated their preference for growth, and it’s time for value stocks to do better for a while. So it makes perfect sense right now for you to migrate to the dividend-rich fields overseas, even if you recognize, as it should be, that in the long run, returns come at the expense of growth.

In the past, it would have been difficult and expensive to build a diversified portfolio of foreign stocks. These days, it’s easy and, with commission-free trading the norm, affordable.

There is of course an easier way to get your fix of international equities: just buy a fund. How does this one-click solution compare to the homemade wallet? Let’s compare two foreign high dividend funds, one from Vanguard and one from Schwab, with a collection of ADRs.

On the yield, the two solutions are very close. Vanguard’s International High Dividend Yield returns 3.8%, Schwab International Dividend Equity 4%. When it comes to costs, funds and DIY wallet are pretty much tied. When it comes to taxes, the personalized portfolio comes first.

Vanguard’s portfolio management fee is 0.28% per annum and Schwab’s is 0.14%. With shares bought directly, you avoid these costs. But you hire others. The custodian bank typically charges 2-6 cents per ADR share each year to cover its administrative costs. Although the occasional company picks up these fees to attract US shareholders, you can expect to lose 0.1% to 0.2% per annum because of these fees.

Trading fees (those bid / ask spreads) are often higher on ADRs than on funds, but buy-and-hold investors won’t lose much this way. Recently, the ADR of HSBC, the London-based bank, was trading at a spread of a dime while that of Korean steelmaker Posco, which has considerably lower trading volume, was at ten cents. The Schwab fund had a spread of three cents.

The only way that individual stocks differ significantly from funds is through taxation. If you hold your international stocks in a taxable account — which you probably will do, in order to claim a federal tax credit against foreign income taxes on dividends — then you can reap losses. Suppose the portfolio as a whole appreciates but four of the 24 stocks sink. You sell them to take advantage of capital loss deductions. After being outside for 31 days to escape the rule of selling linen, you can come back.

Funds can’t do it for you. If the fund as a whole appreciates but some of its positions collapse, it cannot take the losses and then transfer a capital loss deduction to the shareholders of the fund.

Maybe you want the loss deductions, or you want a custom mix that funds don’t offer, or you just like the adventure of picking stocks from faraway countries. After that ?

Start with your broker’s selection tool. This will likely allow you to select ADRs only and then select a trading volume, market cap, or minimum return. Next stop is an investor relations page, almost always available in English for large companies. Then turn to the ADR databases edited by the custodian banks.

I find the directory maintained by JP Morgan particularly useful. It lists 2,559 ADRs, both those managed by JPM and those managed by its competitors.

At JPM, you find out that the ADR of Canon, the Japanese copier company, trades on the NYSE, is overseen by JPM, yields 3.2%, contains home country stock per ADR, and averages 280,000 shares per day of trading volume. It has no fees deducted; obviously Canon is subsidizing this problem.

JPM Info on ADR for ABB

ABB
, the Swiss electrical equipment company, is almost as good but remains silent on costs. For this detail, you turn to Citibank, which JPM usefully reveals as custodian. Citi’s ADR database reveals that its ABB fees were 4.75 cents per share per year. You will also notice that ADR fees tend to increase over time. It would be very helpful for brokerage sites to post ADR fees but as far as I know they never do.

Barriers to international investment have diminished considerably over the past decades, but they have not entirely disappeared. Be prepared to devote time to research.