It’s surprisingly easy to get some international equity exposure via ADRs.
You want income? Look abroad. A rich array of high-yielding blue chips are on offer overseas, especially in Europe: Companies like Credit Suisse Group, Sanofi
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Most of these big-company stocks are very accessible to U.S. investors. They trade here in the form of ADRs.
The American Depositary Receipt is a marvelous invention that makes cosmopolitan investing easy. An ADR manager, typically a large bank, holds foreign securities in an electronic vault and issues ADR claims against them. The bank converts dividends paid in foreign currencies into dollars and sends those dollars into your brokerage account. When you buy or sell the ADR your trade takes place in dollars.
There are thousands of ADRs out there, mostly trading over-the-counter. But 355 of them can be found on either Nasdaq or the New York Stock Exchange. These listed ADRs are often very liquid. Meaning: When you want to get in or out you are confronting a tolerable spread between the bid and asked prices.
The table displays exchange-listed ADRs of companies with market values over $5 billion and with dividend yields at least double the 1.3% available on the average domestic stock. If you bought the lot of them you’d have a starting yield of 4% and a reasonable expectation that the collective payout will increase over time. That is, you expect that any dividend cuts at disappointing companies, of which there will no doubt be several, will be overshadowed by dividend hikes from the others.
For this shopping list I eliminated corporations whose current dividend is more than 70% of expected average earnings over the three-year period 2020-2022. BHP Group, the ore miner, didn’t make the cut: Its $6 dividend (on a $58 ADR) is alluring but on shaky ground. You can use your broker’s stock screening tool to create your own rules, trading current yield off the prospect of growth.
Why do so many foreign companies sport big yields? Because they land in the value bucket, slow-growing but cheap. Europe, an economically sleepy place, has more than its share of value stocks. Morningstar informs us that the average price/earnings ratio on Vanguard’s European index fund is 15.6. The P/E for the Vanguard fund covering the whole U.S. stock market is 21.4.
So far in this century the place to make money has been in the high-growth, tech-dominated U.S. market. But perhaps investors have overdone their preference for growth, and it’s time for value stocks to do better for a while. So it’s perfectly rational at the moment for you to migrate to the dividend-rich fields overseas, even if you recognize, as you should, that over the long pull yields come at the expense of growth.
In times past it would have been difficult and expensive to assemble a diversified portfolio of foreign equities. Nowadays it’s easy and, with commission-free trading the norm, affordable.
There is, of course, an easier way to get your dose of international equities: just buy a fund. How does this one-click solution compare to the home-made portfolio? Let’s compare two high-dividend foreign funds, one from Vanguard and one from Schwab, with a collection of ADRs.
On yield, the two solutions are very close. Vanguard’s International High Dividend Yield yields 3.8%, Schwab International Dividend Equity 4%. On costs, the funds and the do-it-yourself portfolio are roughly tied. When it comes to taxes, the custom portfolio comes out ahead.
Vanguard’s portfolio management fee is 0.28% a year and Schwab’s is 0.14%. With directly purchased stocks you duck those fees. But you incur others. The depositary bank typically charges 2 to 6 cents a per ADR share annually to cover its paperwork costs. Although the occasional corporation will pick up that fee as a way to attract American shareholders, you can figure on losing 0.1% to 0.2% annually to these fees.
Trading costs (those bid/ask spreads) are often higher on ADRs than on the funds, but buy-and-hold investors won’t lose a lot this way. Recently the ADR for HSBC, the London-based bank, was trading at a one-penny spread while the one for Korean steelmaker Posco, which has a considerably lower trading volume, sat at ten cents. The Schwab fund sported a three-cent spread.
The one way in which individual stocks differ sharply from funds is taxes. If you hold your international equities in a taxable account—which you probably will, in order to claim a federal tax credit against foreign income taxes on dividends—then you can harvest losses. Suppose the portfolio as a whole appreciates but four of the 24 stocks sink. You sell those to capture capital loss deductions. After staying out for 31 days in order to duck the wash-sale rule, you can get back in.
Funds can’t do this for you. If the fund as a whole appreciates but some of its positions sink, it can’t capture losses and then pass a capital-loss deduction out to fund shareholders.
Maybe you want the loss deductions, or you want a custom blend that funds don’t offer, or you just like the adventure of selecting stocks from faraway places. What next?
Begin with your broker’s screening tool. It will probably enable you to select just ADRs, and further select for a minimum trading volume, market capitalization or yield. Next stop is an investor-relations page, almost always available in English for big companies. Then turn to the ADR databases published by the depositary banks.
I find the directory maintained by JP Morgan to be particularly helpful. It lists 2,559 ADRs, both those managed by JPM and those managed by its competitors.
At JPM you discover that the ADR for Canon, the Japanese copier company, trades on the NYSE, is overseen by JPM, yields 3.2%, contains one home-country share per ADR and averages 280,000 shares a day of trading volume. It has no fee deducted; evidently Canon is subsidizing this issue.
JPM’s info on the ADR for ABB
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The impediments to international investing have receded a great deal in recent decades, but they are not entirely gone. Prepare to put in some research time.