Investing in Dividend-Yielding ADRs: Tapping Opportunities in Foreign Markets

Published Mon, 2 July 2012 10:30 CET by

Opportunities to earn the most competitive return often exist in foreign markets. The simplest ways for investors to tap those markets is by investing in American Depositary Receipts (ADRs).

Shares of many non-US domiciled companies trade on U.S. listed exchanges and the over-the-counter market through ADRs. ADRs, issued by U.S. depositary banks, are negotiable securities that represent ownership of the securities of a non-U.S. domiciled companies. While securities underlying the ADRs can be debt and money market instruments, in most cases they are equity instruments. These equities of foreign entities represented by ADRs are called American Depositary Shares (ADS). ADRs can represent one or more shares of foreign companies or a fraction of a share. They are denominated in the U.S dollars and pay dividends in the U.S. currency. They are traded like ordinary shares on the official and over-the-counter markets and their prices reflect the price changes in the foreign stock in its home market.

Investors should also be aware of some of the costs and risks associated with owning ADRs. Investors incur costs such as depositary bank fees, deducted from the dividends and other distributions, and foreign exchange fees. Furthermore, access to timely and comprehensive information may be limited, given that foreign companies need not disclose all the information customarily reported by the U.S. listed securities.

Market for ADRs

The BNY Mellon Classic ADR Index consists of 918 ADRs trading on U.S. listed exchanges or over the counter. These ADRs collectively have a market capitalization of $12,454 billion. As of May 31, 2012, BNY Mellon ADR Index returned negative 5%, compared with a positive 2.6% total return for the S&P 500 Index. Some of the most prominent foreign corporate names traded as ADRs include China's Baidu Inc. (Nasdaq: BIDU), Brazil's Vale SA (NYSE: VALE) and Petroleo Brasileiro (Petrobras) (NYSE: PBR) and UK's BP PLC (NYSE: BP). For the list of most widely held ADRs, please consult the table below.

Most Widely Held American Depositary Receipts Table

Highest Yielding ADRs

While almost all most-widely held foreign companies traded as ADRs pay attractive dividends, there is a select group of highly liquid, high-yielding dividend payers among ADRs. The list includes the two largest Spanish banks, Banco Santander (NYSE: SAN) and Banco Bilbao Vizcaya Argentaria SA (NYSE: BBVA), French and Spanish telecom operators France Telecom (NYSE: FTE) and Telefonica (NYSE: TEF), chipmakers United Microelectronics Corp. (NYSE: UMC) from Taiwan and STMicroelectronics NV (NYSE: STM) from the Netherlands, and others. The table below summarizes the top-yielding dividend payers by yield.

Highest Yielding ADRs Table

Small Cap Dividend-Paying ADRs

Income investors can also take advantage of the high growth in the small-cap universe of the foreign companies trading as ADRs. The Bank of New York Mellon Small Cap Select ADR Index tracks the performance of the small-cap ADRs. Investors can invest in select index constituents. Some of the attractive names include Ternium SA (NYSE: TX), a Brazilian steel producer, Grupo Aeroportuario del Sureste, SAB de CV (NYSE: ASR), a company holding concessions to operate, maintain, and develop airports in the southeast region of Mexico, and Telecom Argentina SA (NYSE: TEO), an Argentine telecom operator. Other possible small-cap ADR investment choices are listed in the table below.

Small Cap Dividend-Paying ADRs Table

A lion's share of the future growth in the world's economic output will come from the developing regions of the world, most notably from the BRIC countries (Brazil, Russia, India, and China). Investors have ample opportunities to capitalize on that growth by investing in ADRs.