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As most income investors know, the Bush-era dividend tax reduction is among the old tax cuts that could become a new increase if we "fall off" the fiscal cliff.
This uncertainty is one reason stocks have slumped since Election Day. Predictably, investors are fearful companies will be less inclined to pay new dividends or raise existing payouts if the dividend tax rate jumps.
As it pertains to U.S. stocks, there is at least one bright spot, that being the average payout ratio of U.S. dividend-paying firms is just 30%. That is well below the rates of 50% or higher seen in the 1950s through the 1970s.
The even better news for dividend seekers is the fiscal cliff can be dodged to some extent by establishing a bias toward international dividend stocks. Remember, the fiscal cliff is a U.S. phenomenon and many international companies have diverse, global shareholder bases.
In other words, just because a U.S. telecommunications stock is suffering due to fiscal cliff fears, it does not mean a European or Latin American equivalent will be treated the same way.
Consider these international dividend plays before letting fiscal cliff fears get the better of your investing emotions.
How to Avoid the Fiscal Cliff: Europe Without the Euro
The WisdomTree Europe Hedged Equity Fund (NYSE: HEDJ) is a new twist on an old exchange-traded fund (ETF).
Previously, the fund was heavily exposed to international financial services stocks, and featured stocks from multiple regions. These days, HEDJ is light on financials (less than 8% of the fund's weight) and focuses solely on Europe-based dividend equities.
Alone, exposure to Europe might imply a high degree of risk with HEDJ – but that is not the case because the ETF features a couple of unique twists.
First, HEDJ's index is designed to be a hedge against euro weakness, meaning this a fine ETF to be involved with when the U.S. dollar is rising against the controversial common currency.
Second, HEDJ's portfolio is comprised entirely of companies that not only pay dividends, but that also derive the bulk of their revenue from outside the Eurozone.
Familiar names include Anheuser-Busch InBev (NYSE ADR: BUD), SAP AG (NYSE ADR: SAP) and Sanofi SA (NYSE ADR: SNY). The yield of nearly 3% is decent, but more importantly, HEDJ is chock full of companies that are unlikely to change their current dividend policies because of the fiscal cliff.
Take Some Risk with High Reward
Oil services stocks can accurately be described as a potential-laden pain-in-the-neck for investors.
High beta in nature, these stocks usually flourish when oil prices rise. Conversely, they tumble in unison with crude and there is scant dividend protection on the way down. The average dividend yield for the familiar trio of Schlumberger (NYSE: SLB), Halliburton (NYSE: HAL) and National Oilwell Varco (NYSE: NOV) is barely over 1.1%.
Investors can do better with Seadrill Ltd. (NYSE: SDRL). Try almost eight times better, because shares of this Norwegian offshore drilling services yield 8.6%. SeaDrill features an impressive 14% return on equity and gross and operating margins that are vastly superior to the company's peer group.
Average out SeaDrill's most recent year's worth of dividends and the quarterly payout comes to 82 cents. That means the dividend has grown by over 60% since the first distribution in 2009.
SeaDrill knows it has the oil services dividend game locked down, and since this is a non-U.S. company, there is no legitimate reason for the fiscal cliff to adversely impact this dividend.
Hunt for Big Dividends, Small Volatility
That should change as the yield hunt continues because HILO's index has a dividend yield of 5.67%.
To be sure, HILO is a compelling ETF to consider because it is littered with emerging markets dividend names and dividends in the developing world are on the rise.
However, that is not the only reason to give this fund a look. Oddly enough, it is HILO's exposure to state-controlled enterprises that validate this fund as a solid fiscal cliff avoidance tool.
Not all state-run companies are the value destroyers that Brazil's Petrobras (NYSE ADR: PBR) is. To be candid, now is a great time to consider some state-run firms because governments are just as greedy as other shareholders. That is to say governments want dividends, too, and as the majority shareholder in many emerging markets companies, these governments can actually force dividend increases.
That is exactly what is expected to take place in China and India in the coming months. Those two nations combine for nearly 21% of HILO's weight.
Another country to consider is Russia, where politicians are considering a plan to force state-controlled companies there to payout at least 25% of their profits in dividends. Russia is not part of HILO's mix.
For more tips on how to invest ahead of the looming fiscal cliff, check out these pointers from Money Morning Chief Investment Strategist Keith Fitz-Gerald.
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