No one needs to be reminded how grim it has become to find income-generating investments. Consider: This is the toughest environment for yield since 1871, according to recent research by O’Shaughnessy Asset Management, a quantitative money-management firm. A portfolio allocated 60% to stocks and 40% to bonds would have yielded an average 4.4% a year over that period. Today it would offer just 1.9%.
There’s no relief in sight. Bonds look perilous, and baby boomers have begun retiring, fueling more appetite for income-producing assets. The result: soaring demand (and prices) for U.S. dividend stocks.
One of the relatively bright spots is global dividend stocks. “You get superior yield,” says James Bristow, co-manager of the BlackRock Global Dividend Income Fund, which is up an annualized 10.4% for the past three years. “And you don’t have to pay a premium for it.” Yes, there’s plenty of turmoil in Europe, but there are lots of quality companies there, and many of them derive a healthy portion of their profits from flourishing emerging markets.
Bristow points to pharmaceutical giant Sanofi, which has a dividend yield of 3.3%. “It’s a French-listed company, but more than 30% of its sales come from emerging markets, and those are growing at nearly 10%,” he says. Not only does Sanofi offer a dependable — and growing — payout, but management has moved away from the typical, risky approach of relying on blockbuster drugs. Sanofi has diversified into over-the-counter health care (like Allegra allergy medicine and Icy Hot muscle-pain-relief products), as well as medicines and vaccines for animals. Those growth areas mean that even as Sanofi trades at a trailing P/E of 21, the shares command a mere seven times projected 2014 earnings. “We think it’s one of the best companies in large-cap pharma in adapting its model to the new model of health care,” Bristow says.
O’Shaughnessy Asset Management’s Patrick O’Shaughnessy likes Telstra, which trades at a trailing P/E of 16 and has a dividend yield of 6.0%. It’s Australia’s leading phone company and added 1.6 million mobile customers last year. It has also been paying down debt, a sign of strength. “It’s not just about buying a stock because it’s got a great yield,” he says. “Telstra has strong cash flows, a quality balance sheet, and it’s cheap.”
For those who want to reduce risk and costs by investing in a fund, a good option is the iShares Dow Jones International Select Dividend Index. This exchange-traded fund holds shares of the top 100 yielding companies in developed markets and is currently tilted toward Europe. It yields 4.9% and has returned an annualized 7.0% over the past three years, vs. 4.4% for the MSCI EAFE index. The fund should provide at least some consolation as you wait (and wait) for the return of bond yields.
This story is from the April 29, 2013 issue of Fortune.
