The U.S. equity market has had an excellent performance two years in a row. In 2013, the S&P 500 soared by 29.6% on price basis and this year it is up by 12.6% as year-to-date (YTD) as of Dec 22nd. Many developed and emerging markets on the other hand have had a bad year with returns that pale in comparison to that of the S&P 500.

The YTD price returns of some of the major developed markets are listed below:

UK’s FTSE 100: -2.2%
France’s CAC 40: 0.4%
Germany’s DAX: 3.9%
Spain’s IBEX 35: 5.7%
Canada’s S&P/TSX Composite: 7.1%
Japan’s Nikkei: 8.2%
Australia’s S&P/ASX 200: 0.5%

Last year many of the foreign equity markets lagged the performance of the U.S. market.

Since U.S. stocks are generating great returns some investors may be tempted to dump their foreign stock holdings now. But doing so is not a wise strategy according to two industry experts.

From an article titled Do Foreign Stocks Still Make Sense? by Gregg S. Fisher in Forbes magazine:

The Rearview Mirror

An investor who sells foreign stocks now and adds the money to US stocks is guilty of what in behavioral finance we call the availability bias—the belief that easily recalled recent outcomes (e.g., US market outperformance) will persist in the future. In other words, regardless of valuations and implied expected returns, an emotional investor buys recent winners and sells the losers.

If you watch stock market shows on TV, you probably hear investment pundits convey the impression that they can identify winning markets and asset classes in advance. I encourage you take such forecasts with a grain of salt. There will always be one market or asset that beats the others, but these will trade places nearly every year or even six-month period and are unknowable in advance.

Since the US market shines today, it may surprise you that when we studied 48 developed- and developing-country markets around the world, not once over trailing 1, 3, 5 and 10-year periods (to September 15, 2014) did the US market rank even in the top five. As the exhibit below shows, over 10 years, 32 countries performed better than the US market.

 Click to enlarge

Source: Do Foreign Stocks Still Make Sense?, Gregg S. Fisher, Nov 4, 2014, Forbes

The above chart shows that the U.S. was nowhere near the top five or even ten performing markets. Among the developed markets, countries such as Denmark, Norway, Sweden, Switzerland, etc. performed much better than the U.S.. Mr.Fisher also noted the following:

Since we cannot predict the future, I firmly believe in global diversification, a strategy that has in fact made sense in virtually every long-term period we’ve studied. We like to use rolling returns, which are overlapping cycles starting on the first day of the month and provide a more accurate picture of performance than a snapshot during a single time period. When we look back at all 94 ten-year rolling periods from January 1, 1997 to September 30, 2014, a globally diversified portfolio (64% S&P, 23% MSCI EAFE, 13% MSCI Emerging Markets) outperformed a US-only one in 100% of time periods and by an average margin of 1.77 percentage points annualized. Those are the kind of odds that I like.

The second article that discussed the same topic is by Seth J. Masters,Chief Investment Officer of Bernstein Global Wealth Management.. From Lessons Learned in 2014 published on Dec 10, 2014:

Lesson 2:  Diversification Means Owning Laggards

After leading globally in 2013, in 2014 through November the US stock market beat developed international stock markets by 15.5 percentage points in US dollar terms; it beat emerging markets by 11.5 percentage points, as shown in the first Display, below. This outperformance by US stocks has some investors ready to throw in the towel on global investing.

Click to enlarge

We think selling an asset after a stretch of lagging performance is a bad decision. Often, the lagging asset may be more attractive looking ahead. And that’s what we’re seeing in developed international stocks markets, where valuations are more attractive than in the US stock market.

Since 1990, non-US stock markets have outperformed the US market more than half the time. Since no one can be certain just when this will occur, we think it’s wise to own stocks in all regions.

A similar argument can be made for diversification by size. Large-cap US stocks trounced small- and mid-caps by 8.4 percentage points so far in 2014, but large-caps trailed smaller stocks by 11.7 percentage points annualized from 2001 through 2003. The key is to hold stocks across the size spectrum.

Diversification remains a fundamental tenet of smart investing—both as a way to manage risk and as a way to maximize return.

Source: Lessons Learned in 2014 by Seth J. Masters, Dec 10, 2014, Bernstein Global Wealth Management

Mr.Masters makes many compelling arguments. Now is not the time to sell foreign stocks.In fact, an investor who has cash to deploy can take advantage of the lower stock prices and add to their portfolios at current levels.

Moreover the 10-year annualized return (from 2004 to 2013) for U.S. stocks is only 7.2% based on the MSCI US Index. The 10-year annualized country returns for Denmark, Norway, Sweden and Switzerland easily beat the U.S. return with returns of 15.9%, 15.6%, 15.6% and 10.1% respectively. In addition. the U.S. was not the best performing market in any of the years during the period noted according to the Single Country Index Returns, Periodic Table of Investment Returns 2004–2013 by Blackrock.

Investors looking to diversify their portfolio can consider buying the following ten foreign stocks:

1.Company: Unilever PLC (UL)
Current Dividend Yield: 3.63%
Sector: Food Products
Country: UK

2.Company: Vodafone Group PLC (VOD)
Current Dividend Yield: 5.30%
Sector: Wireless Telecom
Country: UK

3.Company: Autoliv Inc (ALV)
Current Dividend Yield: 2.03%
Sector:Auto Components
Country: Sweden

4.Company: Nordea Bank AB (NRBAY)
Current Dividend Yield: 5.15%
Sector: Banking
Country: Sweden

5.Company: DBS Group Holdings Ltd(DBSDY)
Current Dividend Yield: 4.42%
Sector: Banking
Country: Singapore

6.Company:BASF SE (BASFY)
Current Dividend Yield: 4.33%
Sector: Chemicals
Country: Germany

7.Company:Air Liquide (AIQUY)
Current Dividend Yield: 2.52%
Sector: Chemicals
Country: France

8.Company: Novartis AG (NVS)
Current Dividend Yield: 2.94%
Sector: Pharmaceuticals
Country: Switzerland

9.Company: Roche Holding AG (RHHBY)
Current Dividend Yield: 3.24%
Sector: Pharmaceuticals
Country: Switzerland

10.Company: Anheuser-Busch InBev SA/NV (BUD)
Current Dividend Yield: 2.80%
Sector: Beverages
Country: Belgium

Note: Dividend yields noted above are as of Dec 23, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

Related:

If You Missed The Rally, Then You Just Made The Most Classic Mistake In Investing, Dec 23, 2014, Business Insider

Dividend stocks can generate higher returns from an equity investment compared to non-dividend stocks. The total return from dividend stocks can get a significant boost from dividend reinvestment especially over the long-term. The following chart shows the difference in returns between total returns and only price returns using the MSCI All Country World Index:

Click to enlarge

Source: AGF Management Limited

For the period shown above, the total return was 50% higher than the price return.

U.S. investors looking to add dividend stocks can find plenty of opportunities abroad. I recently came across an article in The Financial Post in which Ramona Persaud, portfolio manger at Fidelity Investments discussed her views on investing in foreign dividend stocks. From the article:

Companies that make the grade can be found anywhere in the world. South Africa, for example, has a lot of companies paying very strong dividends due to efforts since the end of Apartheid to bolster the economy, but a lot of investors won’t touch them because the rand can be very volatile.

“They’re actually very good dividend payers and I’ve found so many great management teams there,” Ms. Persaud said. “Believe it or not, for such a poorly run country, the corporate sector is fairly well run.”

She also highlighted a similar opportunity in both the U.K. and Chile, where pension funds have large equity positions. Since these funds have to service their liabilities, companies became beholden to them to pay fat dividends.

In Australia and New Zealand, meanwhile, investors benefit from a tax shield on dividends, so companies are incentivized to have high payout ratios.

Source: How going global for dividends can generate strong returns, Dec 23, 2014, The Financial Post

The countries that Ms.Persaud points out are excellent choices to hunt for dividend payers.Nine stocks from the countries mentioned above and Sweden’s Svenska Handelsbanken are listed below for further research. Svenska Handelsbanken is one of the top Swedish banks that investors can consider adding for both dividend and steady growth.

1.Company: Nedbank Group Limited (NDBKY)
Current Dividend Yield: 4.22%
Sector: Banking
Country: South Africa

2.Company: Standard Bank Group Limited (SGBLY)
Current Dividend Yield: 4.21%
Sector: Banking
Country: South Africa

3.Company:Banco Santander- Chile (BSAC)
Current Dividend Yield:
Sector: Banking
Country: Chile

4.Company: Banco de Chile (BCH)
Current Dividend Yield: 5.31%
Sector:Banking
Country: Chile

5.Company:Empresa Nacional de Electricidad SA (EOC)
Current Dividend Yield: 2.62%
Sector:Electric Utilities
Country: Chile

6.Company: Westpac Banking Corp (WBK)
Current Dividend Yield: 6.20%
Sector:Banking
Country: Australia

7.Company: Australia and New Zealand Banking Group Ltd (ANZBY)
Current Dividend Yield: 6.05%
Sector:Banking
Country: Australia

8.Company: Telstra Corp Ltd (TLSYY)
Current Dividend Yield: 5.49%
Sector:Telecom
Country:  Australia

9.Company: National Grid PLC (NGG)
Current Dividend Yield: 4.90%
Sector: Multi-Utilities
Country: UK

10.Company:Svenska Handelsbanken AB (SVNLY)
Current Dividend Yield: 5.38%
Sector:Banking
Country: Sweden

Note: Dividend yields noted above are as of Dec 23, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long BCH

Jack Bogle, the founder and former CEO of The Vanguard Group gave an interview to Bloomberg’s Carla Fried earlier this month. His views on investing in markets outside of the U.S. is wrong for many reasons. I will discuss two such reasons below.

From the interview:

You’ve often reminded investors that what’s done well in the past probably won’t do well in the future. So for a patient investor with a long horizon, where should they be investing today?

I like the U.S. The U.S. is the most productive country in the world. It is the most rapidly growing of the industrialized nations, other than Switzerland. We still have plenty of problems, but we’re much better than France, Britain and Germany. And we don’t even want to talk about Italy and Greece. And importantly — people forget this too quickly — we have the most established government and legal institutions.

When you look at global market capitalization it’s true that the U.S. accounts for about 48 percent and other countries 52 percent. But the top three markets outside the U.S. are the U.K., Japan and France. What’s the excitement about there? Emerging markets have great potential, but have fragile sovereigns and fragile institutions.

I wouldn’t invest outside the U.S. If someone wants to invest 20 percent or less of their portfolio outside the U.S., that’s fine. I wouldn’t do it, but if you want to, that’s fine.

Have you ever invested in international markets?

Not really. Other than when I had small amounts when we launched [Vanguard] International Growth and the [Vanguard] International Index fund, I had small investments in both. It’s hard to believe that the differences in returns over the long term will be huge. That’s just not what we have seen for the most part. Why take the currency risk?

Source: Jack Bogle: I Wouldn’t Risk Investing Outside the U.S., Dec 9, 2014, Bloomberg

U.S. investors should invest a portion of their portfolio on foreign stocks.They can invest via stocks of foreign companies trading on the U.S. markets, a mutual fund, an ETF or directly in foreign equity markets if they can access them. Despite the currency risk that Mr.Bogle mentioned and many other risks there are many advantages to investing in overseas stocks.

1. Diversification: By excluding foreign stocks one loses the benefits of diversification. Diversification is one way to reduce risk.Including foreign stocks in their portfolios helps reduce risk. 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:

Click to enlarge

Source: Blackrock

2. Many foreign markets have dividend yields that are much higher than the yields for the U.S. market. So even after accounting for currency risks and dividend withholding taxes one can earn a higher return by investing in foreign stocks. As of Dec 22, the dividend yield for the U.S. equities is 1.9% compared to 3.3%, 2.9%, 4.9 for UK, Canada and Norway according to FT Market Data.

Related ETFs:

• iShares MSCI Canada Index (EWC)
• iShares MSCI Australia Index (EWA)
• Global-X Norway ETF (NORW)
• iShares MSCI United Kingdom Index (EWU)

Disclosure: No Positions