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The 27% Discount Hiding in Plain Sight
Published about 1 hour ago • 5 min read
My international allocation is 0.62%, but the pros say 30% to 40% and I might be making another move to start bringing that higher.
For years my excuse was that I owned PepsiCo (PEP) and Johnson & Johnson (JNJ), so I already had foreign exposure. That's half right. A company like PepsiCo gives you global sales, but not global stock behavior. PepsiCo still trades like a US stock no matter where it sells its soda. And the excuse is getting weaker: Goldman Sachs says 28% of S&P 500 revenue came from overseas in 2024, down from 48% in 2014.
Also, non-US stocks are the cheapest they've been in decades versus the US on a price-to-earnings basis. A lower P/E means you pay less for each dollar of earnings. A P/E of 18 means you pay $18 for every $1 a company earns.
The S&P 500 is around 22. International is around 16. That's a 27% gap. Cheaper tends to mean higher future returns, but it's not a timing tool because cheap can stay cheap for years. Still, international beat the S&P 500 by 14% on total return in 2025.
The direction of the dollar also helps...
When you own foreign stocks, your return has two parts: local return plus currency return. When the dollar falls, foreign earnings convert into more dollars. Since I pay my bills in dollars, that works as a nice hedge.
The dollar also moves in long cycles, historically about 7 years. It climbed from 2011 to 2024, then dropped in 2025 as international took off. US and international move together over the long run, but in any single year the gap can be wide. Over several years, one can triple while the other doubles.
Foreign stocks can also be a hedge because recently, 13 companies made up over 40% of the S&P 500. Some studies say 17% of US investors own zero international. The S&P 500 also holds no Nestlé (NSRGY), ASML, Novo Nordisk (NVO), Diageo (DEO), or Taiwan Semiconductor (TSM). There's no exact US swap for these.
But, you need to know about taxes, because when a foreign company pays a dividend, its home country keeps about 15%. In a taxable account you get that back through the Foreign Tax Credit, claimed directly up to $300 single / $600 married. Above that, you file Form 1116.
In an IRA there's no US tax on that income that year, so there's nothing to claim the credit against. That money is gone. It's about a 0.2% to 0.4% yearly drag, but slightly more for "high" yielders like SCHY.
Foreign stocks also pay more in dividends on average. The SCHD starting yield is around 3.1%, SCHY around 3.4%. Foreign dividends are lumpy, often paid once or twice a year and sometimes with a year-end top-up. It's always best to look at the trailing 12 month dividend, not month to month.
I sometimes have a hard time understanding companies down the street from me. But a company 6,000 miles away, selling a product I've never used with a name I can't pronounce? Much more difficult! With VICI Properties (VICI) or Costco (COST) I get a firsthand view, which is difficult to get from an earnings report. So for foreign stocks, ETFs are the easy button. I buy the basket and skip the homework on each name.
The biggest thing to know is that whatever ETF you pick, you're buying the methodology, not the current holdings. The rulebook decides what the fund owns when it reconstitutes each year.
I currently own SCHY for the developed markets, quality screen and about 130 companies. It's a conservative income investment, but it's trailed the international growth ETFs lately.
I also own IDVO. It buys ADRs of dividend payers like Bank of Montreal (BMO) and ASML, then writes covered calls for extra income on top of the dividends.
Between the two, I'm at 0.62%. I eventually want at least 5%. What I'm missing is growth from foreign companies that don't pay dividends. So I'm considering VXUS, which virtually holds every non-US publicly traded company, about 8,800 stocks!
It yields 2.62% with a 10-year dividend growth rate of 6.5%, so I get the growth piece too. It complements SCHY. Expense ratio is 0.05%, or $5 a year on $10,000. SCHD is 0.08%; IDVO is 0.62% because people manage it, and it's earned the fee lately.
Many investors prefer international ETFs that are dividend growth funds, and there's a TON of them. If that's your flavor, I suggest using AI or Seeking Alpha to pull a ranked list and see which might float your international boat.
So, do you own international? Are you in the 0% club? If you own it, what's your biggest holding and where do you hold it?
Hit reply and I'll respond to every one. Cheers and I'll talk to you soon,
Chris Mayer, who wrote the book on finding 100-Bagger stocks was on Investing by the Books. Many solid bits of investing wisdom were dropped, but what I love is his reminder to focus on the business and not getting caught up dwelling on what you missed.
JPMorgan (JPM) CEO Jamie Dimon was a guest on the Master Investor podcast and was his usual outspoken self. I couldn't help but think that he sounds like someone who has lots of ideas and answers and might make a presidential run soon.
Disclaimer: This is not investment advice. Do your own research before making any investment decisions.
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