Does familiarity breed contempt?
When the slovenly, intrusive brother-in-law declares that he’s extending his uninvited respite at your home for another week, the answer is likely yes.
Investing is another matter. Familiarity breeds affection. It breeds investment.
The unfamiliar that breeds the contempt.
Indeed, only 15% of U.S. investors venture beyond the borders. Fear of unfamiliar holds them back.
To wit, you likely have no problem with Exxon Mobil (NYSE: XOM). Netherlands-based Royal Dutch Shell (NYSE: RDS.a), on the other hand, might give you willies (even though Shell’s ADRs trade on the NYSE).
Too bad, because investor contempt of the unfamiliar blinds them to the opportunities.
Higher-return potential is one.
International equities have lagged U.S. stocks by eight percentage points on average each year for the past 10 years. Many international stocks trade at lower earnings multiples than U.S. stocks.
Reversion to the mean is a linchpin of investing theory. A return to the mean points to higher future returns for foreign stocks.
More income is another missed opportunity.
Exxon Mobil is the more familiar name, but Royal Dutch Shell is the more effusive income payer.
Shell’s dividend yield (6.3%) exceeds Exxon Mobil’s dividend yield (5.0%) by 130 basis points above.
Open your mind and familiarize yourself with the unfamiliar. Or, do the next best thing: Let someone do it for you.
The First Trust Dynamic Europe Equity Fund (NYSE: FDEU) should be that someone.
First Trust holds 81 different U.K.- and EU-based securities. The market value of the securities exceeds $357 million.
The top-10 holdings account for 32% of portfolio value. Many are names you likely recognize: Novartis (NYSE: NVS), GlaxoSmithKline (NYSE: GSK), BASF (OTC: BASFY), and Unilever (NYSE: UNL). All are established, relentless dividend payers.
Let’s familiarize ourselves with the economic backdrop in Europe and the United Kingdom.
European and U.K. stock returns have been volatile and lackluster compared to U.S. stock returns. Europe’s economic recovery is still patchy, but enough encouraging trends have emerged to offer investors hope.
France exited its 18-month recession last quarter. Germany’s economy, Europe’s largest, grew at a 0.7% annual rate, more than economists expected.
The United Kingdom offers additional value.
Credit Suisse data show that U.K. stocks are priced close to 20-year lows on dividend yield and book value. Outflows have been extreme and risk appetite is the lowest of any region.
Because of the depressed prices of U.K. and European stocks, I see the potential for higher returns over the next few years.
I see more immediate income for today.
The First Trust fund is an income-paying machine. It pays a $0.121-per-share distribution, delivered in monthly installments. (That’s $1.45 per share delivered annually).
The fund relies on dividends paid by its holdings. It generates additional income with a cover-call-option strategy. Dividends and option income combine to generate a distribution that yields 10% on the shares. Consider that income yield.
The First Trust fund is the least painful investment for many investors to familiarize themselves with foreign investing. After all, we’re talking about bevy of geographically and sector-diversified stocks as opposed to a single stock.
And it’s on sale.
The First Trust shares trade at a 7% discount to net-asset value (NAV). Pay 93 cents, receive a dollar’s worth of value in return.
Big income and deep value. The two factors alone are compelling enough reasons to familiarizing yourself with the First Trust Dynamic Europe Equity Fund.
Does familiarity breed contempt?