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Foreign Equities Can Round Out Your Income Portfolio Income Strategist | Gregg Wolper

yield of 2 . 0% and Vanguard Total Stock Market Index VTSAX paid out 1 . 9% , Vanguard Total Inter- national Stock Index ’s VTIAX 12 -month yield is a hefty 4 . 4% . The varying payout levels between comparable stocks in the same sectors help explain that differential. Exxon Mobil XOM and Chevron CVX , which lie near the top of U.S.-focused Vanguard Total Stock Market Index’s portfolio, currently have 12 -month yields of 2 . 7% and 3 . 2% , not shabby at all in today’s environ- ment. But the two biggest energy companies in Vanguard Total International Stock Index’s portfolio, BP BP and Royal Dutch Shell RDS .A, have 12 -month yields of 5 . 2% and 5 . 8% , respectively. Besides low-cost index funds, international-equity funds that have Morningstar Analyst Ratings of Bronze or higher and provide a decent yield are worth a look. Among such funds are American Funds Capital World Growth and Income CWGIX , Third Avenue Value TAVFX , and Dodge & Cox Inter- national DODFX . Investors should be looking for funds with impressive potential for returns along with de- cent yield, and these funds fit the bill. Of course, not all international funds have generous dividend yields. More important, choosing a higher- yielding foreign-stock fund over a lower-yielding one may not make sense. For example, Oakmark In- ternational OAKIX and Harbor International HAINX have remarkably strong long-term records as well as exceptionally talented managers in place. Passing them up because their current 12 -month yields are below 2% may well prove to be short-sighted. Another caveat: Investors attracted by the higher dividends paid by some firms overseas should be wary of the temptation to bypass mutual fund choices to buy individual very-high-yielding foreign stocks directly. As in the U.S., an exceptionally high dividend yield may indicate that the company in question is troubled, with a justifiably depressed share price accounting for the steep yield. Such a firm might find it necessary to cut that dividend fairly soon. œ Contact Gregg Wolper at gregg.wolper@morningstar.com

Despite rising in 2013 , yields on most types of bonds are still at historically low levels, prompting many investors to look for income elsewhere. One of the less exotic locations has been the equity markets. Investors have bought stocks for their dividends for decades, but that idea fell out of favor in the excite- ment of the late- 1990 s bull market, as the potential for explosive capital gains trumped the more prosaic attraction of a steady but relatively modest dividend. But two punishing bear markets in the 2000 s shook investors’ faith in the inevitability of huge stock gains, and as a result equity dividends regained their appeal. Stocks that once paid out no dividends or meager ones now provide reliable income. Intel ’s INTC cur- rent 12 -month dividend yield is around 4% , and Microsoft ’s MSFT is close to 3% . Even Apple AAPL initiated a decent-size dividend in 2012 . Another source of equity income that may not imme- diately spring to mind is the universe of foreign stocks. Many companies based outside the United States pay higher dividends than those headquar- tered stateside. One reason, as Alex Crooke, mana- ger of Henderson Global Equity Income HFQAX , recently told Morningstar, may be that executive compensation in the U.S. has tilted more toward option- and stock-based calculations than it has in other countries. That arrangement provides an in- centive for U.S. corporate leaders to focus on in- creasing the share price of their company’s stock rather than paying out profits as dividends. Whatever the reason, investors looking to stock funds for income should keep international choices in mind. One need not focus exclusively on international funds with “dividend” or “income” in their names. The divergence often shows up even in standard broad- market index funds. While the purely domestic Vanguard 500 Index VFIAX has a trailing 12 -month