COLUMN-Where in the world are dividends good?

Fri Jun 1, 2012 10:39am EDT

By John Wasik

CHICAGO, June 1 (Reuters) - Finding consistent total stock returns has always been a challenge. But even as the euro zone beast continues to flair its nostrils and U.S. employment wheezes, there are stocks that are worthy contenders, particularly ones that pay dividends. While they don't eliminate market risk, dividends can bolster total return in skittish equity markets. And some of the best sectors for high-dividend players are far from Wall Street.

For long-term investing, think commodities, energy, utilities and non-banking financial services. Banking is still touchy, but insurance is a safer bet.

Established, brand-name stocks often pay large dividends, but that doesn't mean they should dominate your portfolio. The Admiral Group, a U.K.-based auto insurance company, for example, is hardly in a league with the oil producer Royal Dutch Shell in terms of name recognition. Yet the insurer is the top holding in the SPDR S&P International Dividend ETF , paying a 5.38 percent dividend yield as of June 1.

Shell, by the way, is no slouch in the dividend department either, paying 5.53 percent as of the same date. Europe's largest oil producer reported that its earnings were up 11 percent in the first quarter.

The international dividend strategy is often rooted in sectors in which profits are consistent and growing. That translates into steady dividend growth year after year, although the sectors that are favored for stock-price appreciation will vary.

Let's say you were long in commodities, which isn't a bad play considering the demand for raw materials from developing countries. Then you'd want a company like BHP Billiton Ltd. ), one of the world's largest natural resources companies. BHP mines aluminum, copper, coal, iron ore, nickel, silver and uranium and also has oil and gas reserves.

Another growth sector is telecommunications, particularly in emerging economies. China Mobile, the largest cellphone carrier in the People's Republic, has more than 600 million subscribers - and is growing. That's roughly twice the population of the U.S. already.

A key part of the global dividend strategy is to stay in sectors that are likely to continue dividend growth. That's why exchange-traded funds make the most sense when investing in these companies. The funds can hold broad indexes of dividend payers so you don't have to guess which companies will maintain or raise their payouts. ETFs also blunt risk, since unusually high dividends can be a sign of a company's financial distress.

To find dividend players in emerging markets, I suggest the WisdomTree Emerging Markets Equity Income fund, which gives you exposure to China, Brazil, Taiwan and Turkey. Fund managers look at all sizes of companies and base their selections on an index of companies that have paid at least $5 million in dividends over the past year. An alternative is the SPDR S&P Emerging Markets Dividend ETF.

If you prefer a focus on more developed markets, then consider the iShares Dow Jones International Dividend Index ETF . The fund invests in companies among the top 100 dividend payers that have had payouts in the previous three years. A similar fund is the PowerShares International Dividend Achievers Portfolio.

Many, if not most, of these funds, it should be noted, were touted last year as part of a growing group of "low-volatility" stock funds. While I think that has been a misnomer because it implies that these vehicles won't be hit by general market declines - they certainly will - they deserve a place in your portfolio.

When selecting a global dividend-stock fund, keep in mind that they won't insulate you from market risk and they are not bond funds.

These funds can be volatile and will be impacted if more European countries slip into recession, the U.S. falters or the Eurozone banking crisis isn't resolved. They also are subject to sector risk. If they are over concentrated in say, energy, and that sector is sold off in a market correction, then you will see declines in share prices. Buy them to augment your current stock positions and to boost income, but they shouldn't be core holdings.