Multinationals Yield Income in a Down Market

In a volatile stock market with a near-zero yield in money markets and 10-year Treasury bills yielding 2 percent or less, what’s an investor to do?

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An increasing number of money managers are pinning hopes on an asset class that tends to do well no matter what the environment.

Build an “all-weather” portfolio of large multinational companies that consistently pay dividends, they say. It’s an approach that yields income even when the stock market declines.

“Multinationals are a pretty hot button right now for a lot of good reasons,” says Tom Huber, portfolio manager for T. Rowe Price’s Dividend Growth Fund [PRDGX  Loading...      ()   ] for the past 11 years. “Our diminished economic growth prospects are not as exciting as some emerging markets, and Europe is no better off. Today it’s important to invest disproportionately in emerging markets.”

If your long-term horizon is more than five years, there just aren’t many other good choices, says Fred Taylor, co-founder of North Star Investment Advisors. “Some multinationals are paying bigger dividends than 10-year bonds, sometimes twice as big," he says, "Buy companies with meaningful dividend yields of at least 2.5 percent annually that increase seven to 10 percent a year, and you’re way ahead of the game.”

Taylor mentioned Coca Cola [  Loading...      ()   ] as an prime example. Selling around $69 a share recently, Coke has a dividend yield of 2.7 percent that has been increasing steadily at 10 percent to 15 percent a year, he said.

“They make 80 percent of their earnings overseas—in China, Brazil, India,” says Taylor. “They focus on consumers in growing economies. Shareholders don’t have to worry about Europe and the U.S. growing at barely 1 percent. You want to own companies that are selling to growing markets, that hire in countries where labor costs are a third of what they are here.”

North Star also holds Philip Morris International [PM  Loading...      ()   ], which pays a 4.5  percent dividend and announced a 21 percent quarterly increase last week; Royal Dutch Shell [RDS.A  Loading...      ()   ], a 5.5 percent dividend;Bank of Montreal [BMO  Loading...      ()   ] at 5 percent and Johnson & Johnson[JNJ  Loading...      ()   ] at 3.6 percent.

In July, a Donaldson Capital Management investment policy committee report, "Have Multinational, Dividend-Paying Companies Become the World's Safest Investment?", answered the question unequivocally:

“It is becoming clear that high-quality, multinational corporations may now be the safest investments in the world,” the report says. “They have piles of cash; significant free cash flows; modest debt loads; compete in every corner of the world, and charge a price for their services dictated by the market and not decree; pay taxes in every country in which they operate; and return a significant portion of their annual earnings to their shareholders in the form of dividends.”

The U.S. is just not the fastest growing part of the world right now, says Scott Offen, who manages the common stock investments of Fidelity Strategic Dividend & Income Fund. “There are opportunities in multinational corporations in which you're not tied to any one country for growth, and you can drive your overall revenue growth from revenue growth outside America,” he says.

Dividends have been a stock-investing staple for most of the 20th century, before falling out of favor in recent years. Since 1926, dividends accounted for 42 percent of the total returns from stocks, according to research firm Ibbotson Associates.

“For much of the past decade, they’re all you’ve really gotten,” says T. Rowe Price portfolio manager Huber. 

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