“Globalization” is a big term with complex meanings. But at its essence it means the world is getting smaller.

In centuries past the printing press, steam, the telegraph and internal combustion have had their impacts on shortening lines of communication and stimulating commerce, in ways similar to flight early in the 20th and now the Internet into the 21st century.

For individual investors “globalization” means there are unprecedented cost-effective opportunities to put money to work around the world. Finding opportunities that will help us build wealth over the long term is the goal of Australian Edge.

Access to foreign markets–including Australia–is increasing. But we’re far from a “borderless” market for equity investing.

There are three ways US-based self-directed investors can buy shares in individual foreign companies. The simplest, most direct method is to open an account with a brokerage such as InteractiveBrokers, Charles Schwab or Fidelity that offer direct access to essentially all foreign markets–most importantly, for present purposes, Australia.

You will pay an additional fee on top of your normal commission to transact on the Australian Securities Exchange (ASX). But you will avail yourself of the deepest market with the narrowest bid/ask spreads and the most volume for the stocks we recommend.

A second alternative is to buy so-called F shares listed on a US over-the-counter (OTC) market such as the OTC Bulletin Board or the Pink Sheets. Any competent brokerage, including E*Trade, Ameritrade and Scottrade, in addition to IB, Schwab and Fidelity, should be able to trade the five-letter symbols ending in “F” under which 84 of the 104 AE How They Rate companies trade in the US.

An OTC-traded “F” share represents one ordinary share that trades on the underlying company’s home exchange, the ASX. There may be additional transaction costs depending upon whether your brokerage treats buying F shares as a foreign transaction.

Finally, many foreign companies have recognized the potential to expand their shareholder bases and raise new capital by “sponsoring” American Depositary Receipts (ADR) that trade on major US exchanges such as the New York Stock Exchange (NYSE) or OTC markets. Others have “unsponsored” ADRs that have been packaged by US-based financial institutions that recognize the same potential and are looking to generate fee revenue from their custodianship.

Five Australian ADRs in the AE How They Rate coverage universe trade on the NYSE, leaving 15 How They Rate companies that don’t have active US listings.

The best way for you to buy Australian dividend-payers is the one that costs you the least amount of money. Limiting commission and transaction costs usually means buying the ADR, which is for all intents and purposes the same as buying a regular US listing. At most if not all reputable brokerages an ADR purchase is treated the same for commission and transaction-cost purposes as a regular US-based publicly listed company.

An ADR represents a share or shares held in custody in the issuer’s home market. ADRs trade, clear, settle and pay dividends in US dollar terms and in accordance with established US practices. Forty-three of the 104 Australia-based dividend-payers we track in the AE How They Rate coverage universe have an ADR. Twenty-four of those 43 sponsor their ADR, meaning they have actively sought a US-based custodian to help them boost their share ownership base or raise new capital. Of the 10 companies included in the AE Portfolio, six have US ADRs, four of them of the sponsored variety.

In the October News & Notes we discuss ADRs and include a table–which will become a permanent feature at www.AussieEdge.com–that lists the ADRs in How They Rate.

About the Liquidity

The common pitch made by major ADR custodians, including Bank of New York Mellon Corp (NYSE: BK), Citigroup (NYSE: C) and JPMorgan Chase & Company (NYSE: JPM), is that ADRs make it easy to buy and hold stock in foreign companies. It would be too much of a stretch to make the similar blanket statement that foreign issues not traded on the NYSE are “easy” to sell.

But our focus is on buying and holding high-quality Australia-based dividend payers for the long term. We don’t dismiss entirely factors such as liquidity and daily share volume, but these are much more important considerations for traders. At a surface level these statistics, based on US OTC numbers, are extremely unfavorable for most of even our AE Portfolio Holdings. Leave out global mining giant and Aggressive Holding BHP Billiton Ltd (ASX: BHP, NYSE: BHP), whose NYSE-listed ADR, which represents two ordinary, ASX-listed shares, has traded at an average volume of nearly 5 million a day for the past 60 days. The next-most-impressive 60-day average volume figures for Portfolio Holdings with US ADRs are in the 125,000-to-quarter-million range–which may not make these securities “liquid” from a trader’s perspective but certainly supports our objectives.

Conservative Holding APA Group (ASX: APA, OTC: APAJF)–whose key assets include fee-generating natural gas pipelines–doesn’t support an ADR in the US. Its F share–which represents one ASX-listed ordinary share–has traded on average volume of 17,000 for the past 60 days. That puts it at the top of the US volume rankings for those Portfolio Holdings without a US ADR listing. What APA does offer is a high, sustainable and potentially growing dividend–it’s yielding more than 8 percent as of Tuesday’s close–that’s backed by what have proven to be among the most reliable assets in the world.

To get an accurate appraisal of its position in the global equity market you have to consider APA’s average daily volume on the ASX, which is 1.56 million shares over the trailing 60 days, and its market capitalization, which is AUD2.65 billion. It is a substantial company that’s liquid according to any measure on one of the world’s most important stock exchanges.

We are a buy-and-hold operation. That doesn’t mean we aren’t mindful of the fact that investors want to be able to get out from under a losing position should the need arise. We have, in fact, recent and searing experience, as we continue to second-guess our failure to step aside from Yellow Pages Inc (TSX: YLO, OTC: YLWPF) around the time it first deviated from a commitment to maintain its post-conversion dividend at its income trust level in late 2010.

A Dividend Investing History

Of course we didn’t make an immediate move on Yellow, opting instead to follow quarterly numbers as well as management guidance, which until last summer reflected a slow but sure transition from print to the Internet. But the experience illustrates the point that such situations happen, even in the context of an otherwise stable, growing portfolio. That, in fact, describes the CE situation well, and Yellow is, all irony acknowledged, part of the stability equation, too.

Allow me to elaborate. In the October issue of Canadian Edge I took a look back at the original Portfolio, the one rolled out in the July 2004 debut issue. What was then called the “Portfolio Top Ten” included eight companies that still exist in a form close to the one we first covered.

From Jul. 30, 2004 (the “recent price” listed in the Portfolio table of the pdf version of CE Issue No. 1 is for Jul. 29, 2004), through Sept. 30, 2011, the S&P 500 generated a total return of 18.9 percent in US dollar terms. The S&P/Toronto Stock Exchange Composite Index’ total return for the same timeframe was 111.1 percent in US dollar terms, 65.2 percent in Canadian dollar terms. And the S&P/TSX Income Trust Index generated a total return of 212.8 percent for US dollar-based investors, 144.9 percent for loonie investors.

The average total return from Jul. 30, 2004, through Sept. 30, 2011, for the original CE Portfolio, including dispositions of two original Holdings and the weight of Yellow Media, is 175 percent.

And 29 of the 40 individual companies in How They Rate are still on the go, while the other 11 all were bought out at prices that represented at least slight premiums to their prices on the days of their respective deals announcements.

What we’re doing, in effect, is extending our commitment to quality across the Pacific to Australia. This will be a low-turnover Portfolio the foundation of which will be the top dividend-paying companies in the Land Down Under. The average market capitalization of the AE Conservative Holdings as of Oct. 18 is AUD20.1 billion, a figure inflated by a couple behemoths but whose smallest component is AUD954 million. The average for the Aggressive Holdings is AUD53.3 billion, boosted by BHP but with a smallest member checking in at AUD1.52 billion.

Again, these are large companies that do trade significant volume on the Australian Securities Exchange. Every company in the Australian Edge How They Rate coverage universe is a member of the Standard & Poor’s/Australian Securities Exchange 300 Index.

It’s important to note a couple fundamental tenets of portfolio construction, regardless of whether or not yours includes Australian exposure. For one, no single issue should account for too much of the overall value of your portfolio. You must build into your portfolio management program a step that includes rebalancing your holdings on a regular basis.

With the original CE Portfolio as our guide, we can see that Yellow’s implosion didn’t prevent the group from outperforming relevant benchmarks from July 2004 through Sept. 30, 2011. Again, situations like Yellow happen. As a result of this experience, in fact, and in light of the slow and jagged global economic trajectory and the extraordinary volatility still plaguing markets, we’ve returned to a “zero tolerance” policy on dividend cuts for CE Portfolio Holdings.

Second, establish a position in three steps–a third now, a third a month or a quarter from now, and the final third a month or a quarter after that. Scaling into buy-and-hold positions in lower-volume stocks that trade OTC in the US is one way to limit your impact on the share price.

Finally, exposure to Australia should be limited to no more than about 20 percent of the total value of your portfolio. Overloading on any one stock, sector or market is a sure path to long-term wealth destruction, the exact opposite of what we’re after.

As important as it is to have a plan, you must stick to it. The experience of the last five years has been trying, to say the least. But what we’ve learned is that dividend-paying stocks backed by solid underlying businesses are among the first to rebound when markets stabilize, and they regain lost ground and then some in the process. What now seem like inevitable and violent downturns are mitigated by consistent dividend payments.

A July 2011 report from BNY Mellon illustrates the growing importance of allocating assets overseas, for US-based investors as well those in other jurisdictions looking to maximize total return and diversify. Global depositary receipt (DR) trading volume reached 80.5 billion DRs valued at USD1.91 trillion through Jun. 30, 2011, increases of 3.1 percent and 4.5 percent, respectively, compared to a year ago.  Both figures represent all-time mid-year highs.

There are now 3,413 DR programs, up from 3,214 a year ago, for issuers from 83 countries available to investors. US-listed DRs (or ADRs) traded USD1.61 trillion in value and 65 billion in volume during the first half of 2011, 84 percent and 81 percent, respectively, of the global total. OTC ADR trading value totaled more than USD55.4 billion, a 52 percent year-over-year increase.

As of March 2011 the total amount of US investment in global equities increased 15.7 year over year to approximately USD24.2 trillion, according to the US Federal Reserve. Non-US equities (both ADRs and ordinary shares) accounted for 18.9 percent of this amount, or USD4.6 trillion, a 13.8 percent year-over-year increase.  

During the first half of 2011, 79 new sponsored programs for issuers from 26 countries were established, an increase of 15 programs, or 23.4 percent, from the same period last year.  Of 2011’s new DR programs, 28 were listed on stock exchanges, 11 on the Luxembourg Stock Exchange, six on the London Stock Exchange, seven on the NYSE and four on the Nasdaq. The remainder trade on various OTC markets.

And issuers from Australia led with 13 new programs.

You are among the first-moving individual investors to seek opportunities in foreign markets. That means you’ll encounter bigger risks than those who will follow you. The trend is clear, and it’s only become stronger during this extended period of market volatility that really began back in 2007.

“Globalization” also means that there simply more dividend-paying stocks backed by solid underlying businesses in which Americans can invest.

The Roundup

The biggest news for the AE Portfolio since the October issue was published on Friday is the ratification by Conservative Holding Telstra Corp Ltd’s (ASX: TLS, OTC: TTRAF, ADR: TLSYY) shareholders of an AUD11 billion deal with Australia’s-government backed National Broadband Network (NBN) that includes the eventual separation of the company into two parts.

Telstra owners approved the arrangement Tuesday morning Sydney time, as more than 99.09 percent of shareholders voted “yes,” perhaps because management has indicated some sort of return of capital may be in the offing following final settlement of the NBN deal. Only after the Australia Competition and Consumer Commission (ACCC) OKs the “structural separation” components can the deal be finalized.

ACCC has raised concerns about Telstra’s proposed transparency measures, which are designed to ensure the company’s retail business and its competitors are treated equally during the rollout of the broadband network. Telstra management has consistently said that its negotiations with the ACCC continue on an amicable basis.

The chairman of Telstra’s board of directors, Catherine Livingstone, announced earlier during the company’s annual general meeting that it will pay a AUD0.28 per share dividend in 2011-12 and 2012-13. She also said the board would consider a share buyback in 2011-12.

Telstra will progressively decommission its fixed-line copper network and allow NBN to access its pits, manholes and exchanges, and it will sell some infrastructure. Legacy basic local/long distance phone service and print directories businesses were roughly 10 percent of cash flow for Telstra in 2010-11 and are in decline. As we note in the October Portfolio Update, holding the assets Telstra’s surrendering would have required billions in additional costs with no clear benefits, at the same time diverting attention and resources from wireless and other businesses with futures.

Growth of wireless, for example, which is benefitting from the introduction of a 4G LTE (long-term evolution) network, will more than make up for this. Annual capital spending of AUD2.5 billion to AUD3.5 billion–which will be augmented by proceeds from the NBN deal–will allow Telstra to fortify its status as Australia’s wireless king.

Buy Telstra up to USD3.20 on the Australian Securities Exchange or using the symbol TTRAF on the US OTC market. Telstra’s US ADR, which represents five ordinary ASX shares, is a buy up to USD16. Buy whichever your broker will pick up more cheaply.

Elsewhere, Aggressive Holding BHP Billiton Ltd (ASX: BHP, NYSE: BHP) reported that fiscal 2012 first-quarter (ended Sept. 30) was a record 39.57 million metric tons, up from 31.98 million metric tons a year ago and 35.53 million metric tons the previous quarter. Demand from Asian steel mills and BHP’s expansion activity drove the production gain.

Petroleum production was 51.4 million barrels of oil equivalent (boe), up 19 percent from a year ago and 19 percent from the June 2011 quarter on the acquisition of US shale assets as well as strong performance at existing operations. Buy BHP Billiton, which trades on the New York Stock Exchange (NYSE), under USD80. Note the NYSE-listed security is an ADR worth two BHP shares as traded in Australia. The price shown in the Aggressive Holdings Portfolio table is the US dollar price of one BHP share.