Dividend returns account for a significant part of total returns especially over the long-term in many markets. So it is important to hold dividend-paying stocks in the portfolio. Even a small dividend yield can amplify returns die to the effect of compounding.

How much do dividends contribute to performance? In this post lets take a look at three global regions.

1) Europe:

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Dividends have consistently produced a positive return to European stocks since 1970 as shown above. They accounted for 39% of the total returns for the entire period shown in the chart. This is indeed substantial . During periods of stock price declines dividends have helped investors offset the losses. As European companies generally tend to have high payouts, Europe offers a fertile hunting ground for investors looking for income stocks.

2)North America:

In North America also one-third of the returns came from dividends. Though the payout ratio in the U.S. is lower than in Europe, one advantage is that companies have room to raise the payouts should they decide. As large-cap U.S. firms are flush with cash this should not be an issue.

3) Asia excluding Japan:

Dividends accounted for more than one-third of the total returns in Asia as represented by the MSCI AC Asia ex Japan Index. The definition of this index from MSCI:

The MSCI AC (All Country) Asia ex Japan Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia, excluding Japan. The MSCI AC Asia ex Japan Index consists of the following 10 developed and emerging market country indexes: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand.

Source: Dividends instead of low interest rates, March 2015, Allianz Global Investors

Related ETFs:

• iShares Dow Jones Select Dividend ETF (DVY)
• SPDR S&P Dividend ETF (SDY)
• Vanguard Dividend Appreciation ETF (VIG)

Disclosure: No Positions

The automobile industry is the second largest and most important to the U.S. economy after the real estate industry. During the global financial crisis auto sales declined with the recession. Since then the industry has picked up steam and continues to show strong growth year after after. The following chart shows the annual growth of auto sales in the country since 1980:

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Source:  Truck Sales Plow Through February, Mar 3, 2015, WSJ

Based on the latest estimates, total sales this year may exceed 16 million vehicles. For a country with a population of about 318 million, 16 million a year is still a big number by any measure. Some of the reasons for investing in the auto sector include:

• The auto industry employs millions of workers directly and indirectly and will get bailed out by the state in case of financial troubles. The bailout of GM dubbed as “Government Motors” for a while is an example.
• Public transportation system is non-existent for the most part in all of the country other than the big metros like New York, LA, Chicago, Boston, etc. Hence cars are the only means of transportation for people.
• So the gas pump can be considered as the umbilical cord of most Americans since without a car and the fuel to make it run survival becomes almost impossible.

• Americans love their cars. So it is not unusual to find families spend more on cars per month than on food or other things.
• The infrastructure of the country’s whole transportation system is mainly based on autos. For example, sub-urban living and the mall culture cannot exist without autos.

How to profit from growth of auto industry in the U.S.?

The best way to profit from the popularity and dominance of the auto industry is NOT to invest in auto makers but to invest in companies that support the auto industry. Auto makers are saddled with many issues like high wages, legacy costs like pensions, healthcare, etc. So investing in their stocks is not a good idea. Even though it is a oligopoly industry any player could still go bankrupt due to the mentioned issues wiping out equity investors.

Companies provide the nuts and bolts to the auto industry are good options for investments. For example, auto parts makers have a solid business model since they not only supply parts to auto makers for the production of new cars but also sell after-market parts to consumers directly. These firms may include tire makers, auto parts makers, car seat makers, oil companies, etc. Some of the domestic and foreign firms that support the automobile industry are listed below for consideration:

1. Autoliv Inc (ALV)
2. Continental AG (CTTAY)
3. Compagnie Generale DES Etablissements Michelin SCA (MGDDY)
4. Magna International Inc(MGA)
5. Denso (DNZOY)
6. AutoZone, Inc. (AZO)
7. Nokian Renkaat Oyj (NKRKY)
8. Johnson Controls Inc. (JCI)
9. Bridgestone Corp. (BRDCY)
10. Lear Corp. (LEA)

Disclosure: Long DNZOY, CTTAY

Update:

Looking for the latest auto sales data or wondering which cars are the top sellers in the U.S.? Checkout The Wall Street Journal’s cool Auto Sales page.

The performance of Cyclical stocks is directly related to the state of the economy.So if the economy is in contraction mode cyclicals do not perform well. But if the economy growing then they also grow. Cyclicals include the Industrial, Consumer Discretionary, Information Technology and Materials sectors. For example, during recessions restaurant companies will suffer as consumers cut back on their discretionary spending such as eating out, going to the movies, taking vacations, etc.

Defensive stocks, as the name suggests, are great for all economic and market conditions. These stocks perform well not only during adverse economic conditions  but also during periods of economic expansions. This is because even in a recession people have to spend money on life’s necessities such as food, water, electricity, soap, etc. Unlike the cyclicals defensive stocks offer stable growth during recessions and expansions though they do not very high growth during expansions. Either way defensive stocks are a must in an investors’ portfolio as they provide stable and growing dividends and decent price appreciation over the long-term. Defensive sectors include the Consumer Staples, Utilities, Health Care and Telecom.

I came across an interesting article by authors at Societe Generale that clearly explained the concept of cyclical and defensive stocks’ performance using a simple example. From the article:

The graph below provides a concrete example on how Cyclical and Defensive stocks behave. We have chosen the automobile (Cyclical) and beverages (Defensive) sectors in the US and compared their performance. We have also highlighted the main recession periods.

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We obviously notice at a first sight the higher amplitudes of the automobile sector against the beverages, but the most important thing that this chart illustrates, is the behavior of these sectors in a period of contraction. As we can see in the 2008 crisis for example, the decline in prices in the performance of the automobile sector is way larger than beverages. This means that the investor  holding an automobile stock like Ford would have suffer larger losses.

Source: Cyclical vs. Defensive Stocks, Societe Generale

Even though European and the U.S. economies are in recovery it is still a wise strategy to allocate some portion of a portfolio to defensive stocks. Should the current recovery stall for some reason these stocks will offer a “cushion” effect to a portfolio that declines due to adverse market conditions.

Some of the foreign defensive stocks are listed below for investors to consider for further research:

Consumer Staples

1. Unilever NV (UN)
2. Unilever PLC (UL)
3. Nestle SA (NSRGY)
4. Danone SA (DANOY)

Healthcare

1. GlaxoSmithKline (GSK)
2. AstraZeneca PLC (AZN)
3. Novartis AG (NVS)
4. Novartis AG (NVS)
5. Roche Holding AG (RHHBY)
6. Fresenius Medical Care AG & Co (FMS)

Utilities

1. Edp Energias De Portugal SA (EDPFY)
2. National Grid PLC (NGG)
3. Electricite de France SA (ECIFY)
4. Empresa Nacional de Electricidad SA (EOC)
5. Iberdrola SA (IBDRY)
6. Gas Natural SDG SA(GASNY)

Telecom

1. Philippine Long Distance Telephone Co (PHI)
2. Telenor ASA (TELNY)
3. Vodafone Group PLC (VOD)
4. Telefonica SA (TEF)
5. BCE Inc. (BCE)
6. Telstra Corp Ltd (TLSYY)
7. Orange (ORAN)

Disclosure: No Positions

Washington DC, USA

In an article in December last year I wrote why U.S. investors may want to diversify by holding foreign stocks. Quoting from that piece:

For example, though the U.S. stocks have done very well in 2013 and this year, there is no guarantee they will continue to outperform other markets in the future. No country has been the top performer consistently every year as shown in the following Periodic Table of Investment Returns for Developed Markets 2013:

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So it turns out that European stocks have outperformed U.S. stocks at least so far this year. We will have many months to go.Hence we cannot predict if this trend will continue thru the rest of the year.

The question on some investors’ mind is if European stocks can maintain their current bull run.

According to a research report by Thornburg Investment Management, U.S. stocks and their European counterparts have taken turns in outperforming each other in the past. The following table illustrates this fact using the S&P 500 and the MSCI EAFE Index:

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By moving into attractively valued stocks with more upside potential, there’s also more downside protection, as Benjamin Graham’s “margin of safety” precept has long suggested. This common sense investment principle may be why the S&P 500 Index and the MSCI EAFE Index have taken turns outperforming each other over the last four-and-half decades. So while the S&P 500 beat the MSCI EAFE by 58% from November 30, 2007, through October 31, 2014, the MSCI EAFE outperformed the S&P 500 by 60% over the preceding seven years (Figure 2).

Though past performance does not predict future results, in the period from 2000 to 2007 the MSCI EAFE had a strong run beating the S&P 500.

At end of 2014, European stocks were trading at very cheap levels compared to American stocks. However with the current rise of European equities they are not very cheap now but there is still room to grow.

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NOTE: The above chart is based on data as of 12/31/14.

Source: Margin of Safety:Tactical Rebalancing and Strategic Allocation in Overseas Equities, Feb 2015, Thornburg Investment Management

The key takeaway from this post is investors need not dump their European holdings now.Rather they can wait for additional growth as the ECB’s stimulus program has just started. Also any new investments can be made very selectively in a phased manner.

Related ETFs:

• SPDR S&P 500 ETF (SPY)
• SPDR STOXX Europe 50 ETF (FEU)
• SPDR DJ Euro STOXX 50 ETF (FEZ)

Disclosure: No Positions