Is international exposure overrated?

International diversification has always been sold on individual investors, as a means to reduce volatility in returns and enhance their portfolio returns. In essence, when US markets zig, the international markets would zag and vice versa. This might have been a great strategy a few years and decades ago, but in out globalized society, it might be less of a factor. Presently, global markets are increasingly moving at same pace, because of globalization. This correlation was evident during the financial crisis of 2007 – 2009, when all global markets tanked.

In a previous article I discussed the pros and cons of international diversification. I came up with more cons for dividend investors than pros. I tried to look at international exposure using another angle, and calm down US dividend investors that increased international exposure would not really add that much to the stability of their dividend incomes.

In the table below, I have listed the ten companies with the highest weight in the S&P 500. In addition, I have also listed the percentage of revenues that each one of these companies derives from their international operations. The ten companies with highest weight in the index accounted for approximately 18% of S&P 500. On average, these global companies derived 48% of their revenues from international operations.

Name	Ticker	Sector	Weight	International Sales
Apple Inc.	AAPL	Information Technology	3.46	61%
Exxon Mobil Corporation	XOM	Energy	2.3	64%
Microsoft Corporation	MSFT	Information Technology	2.18	52%
Johnson & Johnson	JNJ	Health Care	1.69	55%
General Electric Company	GE	Industrials	1.46	53%
Berkshire Hathaway Inc. Class B	BRK.B	Financials	1.45	16%
Wells Fargo & Company	WFC	Financials	1.41	5%
Procter & Gamble Company	PG	Consumer Staples	1.3	65%
Chevron Corporation	CVX	Energy	1.29	59%
JPMorgan Chase & Co.	JPM	Financials	1.28	45%

Each of these companies has different year-end dates. I tried to analyze the latest annual reports and other publicly available corporate information out there, which was 2013 for the majority of situations. 

If we were to extrapolate the results from this sample to the whole universe of stocks in the S&P 500, one can conclude that a large portion of revenues for US companies is derived from international operations. As a result, US investors who purchase shares in US multinationals such as Procter & Gamble (PG) or Johnson & Johnson (JNJ) can gain international exposure simply by investing in these US stocks. These global conglomerates operate businesses in many countries, and generate diversified streams of income from these international locations. These cashflows are then used to grow the business, with the excess distributed to shareholders as dividends.

As a result, I believe that adding internationally listed stocks would not dramatically improve the performance of a dividend portfolio. By purchasing US stocks with global operations, the domestic US dividend investor gains exposure to global income streams, without the hassle of international taxation or learning international accounting rules.

Full Disclosure: Long XOM, JNJ, GE, BRK/B, WFC, PG, CVX

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