When it comes to dividend stocks, most investors hone in on the opportunities just here at home. However, that hometown bias can really harm your portfolio. There are plenty of large multinationals churning out steady cash flows and earnings located overseas. Investors strictly focusing on the U.S. are missing out on plenty of dividend stocks.
But it’s understandable why many investors fail to venture overseas. It can be scary to think about sinking your hard-earned money into a Chinese state-owned firm or Chilean copper miner that you likely know little about. Which is why investors looking at international dividend stocks should focus on the United Kingdom.
Investing in the U.K. isn’t so much of stretch from investing here at home. It features some of the largest global firms across a variety of sectors and industries. You probably use many of their products in your own home or at work.
Adding to the appeal of dividend stocks across the pond, U.K. stocks feature a higher dividend yield than the S&P 500. For example, the iShares MSCI United Kingdom ETF (EWU) currently has a trailing 12-month dividend yield of 4.25%. U.K. stocks are also cheaper on a P/E basis.
All in all, the U.K. offers a great place for investors looking to get their feet wet in international dividend stocks. Here are three of the U.K.’s finest.
Best U.K. Dividend Stocks #1: National Grid (NGG)
Dividend Yield: 4.64%
Here in America, utilities are often a fruitful place for investors to find dividend stocks. It’s no different in the U.K, and one of the largest utilities over there is National Grid (NGG).
NGG features electric transmission and gas distribution assets across the U.K. as well as the cold-weather Northeastern United States. It controls 50% of Britain’s gas distribution network as well as serving as the main operator of its electric grid.
The key words here are “transmission” and “distribution.”
Unlike, utilities such as First Energy (FE), NGG doesn’t own any of its own power plants — just the power lines and gas pipelines that deliver that energy to end users. It’s a highly regulated business that provides stable cash flows and removes National Grid from any sort of commodity or environmental regulation risk. NGG simply collects a fee every time electricity passes over its wires or gas moves through its pipelines.
Basically, NGG is as close to an energy toll-road as you can get.
That toll-road-like nature has resulted in steadily increasing cash flows. NGG has managed to grow its operating cash flows from $3 billion in 2013 to $4.3 billion in 2015. Those cash flows have trickled down to shareholders as larger dividends as well. NGG currently yields 4.69% and trades for for a P/E of 17.5.
Best U.K. Dividend Stocks #2: Diageo (DEO)
Dividend Yield: 4.95%
What do Captain Morgan rum, Smirnoff vodka and Johnnie Walker scotch have in common? They are the leading spirits in their respective categories, and they all happen to be owned by the U.K.’s Diageo (DEO).
But Diageo’s boozy empire doesn’t stop at just these three. It encompasses a whole range of beer and spirit brands. In fact, DEO is the leading booze company in the world by volume, sales and operating profits.
And that position has been a boon to DEO’s investors. When Diageo reported its interim results back in July (U.K. firms only report earnings twice a year), it showed $2 billion in free cash flows — an increase of $700 million, or 54%. That result promoted management to raise its dividend by 9%.
However, more dividend increases could be coming DEO’s way. The firm recently cut loose its wine portfolio. Those assets have been a slow grower for the firm and have been an operational ball-and-chain. The cash from the sale will go towards other bolt acquisitions designed to further grow its spirits and beer portfolio. Ultimately, Diageo will be a better dividend stock because of the sale.
In the meantime, current investors in DEO can be treated to the firm’s growing 4.95% dividend yield.
Best U.K. Dividend Stocks #3: Royal Dutch Shell (RDS.A)
Dividend Yield: 7.2%
The recent decline in oil and natural gas prices has also caused major integrated giant Royal Dutch Shell (RDS.A, RDS.B) to decline hard. So far, RDS shares are down about 21% this year. That decline has also made Shell a big-time bargain for investors looking at the U.K.’s dividend stocks.
RDS shares now yield around 7%.
Backing that yield are massive liquidity — around $27 billion in cash — and Shell’s massive asset base. As an integrated energy firm, Shell owns plenty of refining muscle, which benefits from lower oil prices. Also helping on the cash flow front is its ownership/general partner position in Shell Midstream Partners LP (SHLX). SHLX provides plenty of IDRS and tax-deferred distributions that flow right into Shell’s bottom line.
The firm’s continued merger plans with BG Group will fuel that yield further down the road. As we’ve stated before, that deal will make RDS the play in global LNG exports and production. As one of the major suppliers of future energy demand, Shell will be able to realize some big cash flow boosts over the longer haul, bolstering its position among dividend stocks to buy today.
RDS shares currently trade for a dirt-cheap P/E of 12.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.