diff --git a/sphinx_gallery/gen_gallery.py b/sphinx_gallery/gen_gallery.py
index f19cdb98a..f1e78e2f7 100644
--- a/sphinx_gallery/gen_gallery.py
+++ b/sphinx_gallery/gen_gallery.py
@@ -11,6 +11,7 @@
 
 
 from __future__ import division, print_function, absolute_import
+import codecs
 import copy
 import re
 import os
@@ -188,24 +189,24 @@ def generate_gallery_rst(app):
         computation_times += this_computation_times
 
         # we create an index.rst with all examples
-        fhindex = open(os.path.join(gallery_dir, 'index.rst'), 'w')
-        # :orphan: to suppress "not included in TOCTREE" sphinx warnings
-        fhindex.write(":orphan:\n\n" + this_fhindex)
-        for directory in sorted(os.listdir(examples_dir)):
-            if os.path.isdir(os.path.join(examples_dir, directory)):
-                src_dir = os.path.join(examples_dir, directory)
-                target_dir = os.path.join(gallery_dir, directory)
-                this_fhindex, this_computation_times = generate_dir_rst(src_dir, target_dir, gallery_conf,
-                                                                        seen_backrefs)
-                fhindex.write(this_fhindex)
-                computation_times += this_computation_times
-
-        if gallery_conf['download_all_examples']:
-            download_fhindex = generate_zipfiles(gallery_dir)
-            fhindex.write(download_fhindex)
-
-        fhindex.write(SPHX_GLR_SIG)
-        fhindex.flush()
+        with codecs.open(os.path.join(gallery_dir, 'index.rst'), 'w',
+                         encoding='utf-8') as fhindex:
+            # :orphan: to suppress "not included in TOCTREE" sphinx warnings
+            fhindex.write((u":orphan:\n\n" + this_fhindex))
+            for directory in sorted(os.listdir(examples_dir)):
+                if os.path.isdir(os.path.join(examples_dir, directory)):
+                    src_dir = os.path.join(examples_dir, directory)
+                    target_dir = os.path.join(gallery_dir, directory)
+                    this_fhindex, this_computation_times = generate_dir_rst(src_dir, target_dir, gallery_conf,
+                                                                            seen_backrefs)
+                    fhindex.write(this_fhindex)
+                    computation_times += this_computation_times
+
+            if gallery_conf['download_all_examples']:
+                download_fhindex = generate_zipfiles(gallery_dir)
+                fhindex.write(download_fhindex)
+
+            fhindex.write(SPHX_GLR_SIG)
 
     if gallery_conf['plot_gallery']:
         logger.info("Computation time summary:", color='white')
diff --git a/sphinx_gallery/gen_rst.py b/sphinx_gallery/gen_rst.py
index b60c691c2..0db899da0 100644
--- a/sphinx_gallery/gen_rst.py
+++ b/sphinx_gallery/gen_rst.py
@@ -378,7 +378,8 @@ def generate_dir_rst(src_dir, target_dir, gallery_conf, seen_backrefs):
                        location=src_dir)
         return "", []  # because string is an expected return type
 
-    with open(os.path.join(src_dir, 'README.txt')) as fid:
+    with codecs.open(os.path.join(src_dir, 'README.txt'), 'r',
+                     encoding='utf-8') as fid:
         fhindex = fid.read()
     # Add empty lines to avoid bug in issue #165
     fhindex += "\n\n"
diff --git a/sphinx_gallery/tests/conftest.py b/sphinx_gallery/tests/conftest.py
index 52ead110c..4deeacf6a 100644
--- a/sphinx_gallery/tests/conftest.py
+++ b/sphinx_gallery/tests/conftest.py
@@ -24,7 +24,8 @@ def __init__(self):
 
     def status_iterator(self, *args, **kwargs):
         self.calls['status_iterator'].append(Params(args, kwargs))
-        yield
+        for it in args[0]:
+            yield it
 
     def warning(self, *args, **kwargs):
         self.calls['warning'].append(Params(args, kwargs))
diff --git a/sphinx_gallery/tests/test_gen_rst.py b/sphinx_gallery/tests/test_gen_rst.py
index 18f2e9bfb..44ff954ce 100644
--- a/sphinx_gallery/tests/test_gen_rst.py
+++ b/sphinx_gallery/tests/test_gen_rst.py
@@ -9,17 +9,18 @@
 import ast
 import codecs
 import copy
+import logging
 import tempfile
 import re
 import os
 import shutil
-import warnings
 import zipfile
 import pytest
 
 import sphinx_gallery.gen_rst as sg
-from sphinx_gallery import gen_gallery
-from sphinx_gallery import downloads
+from sphinx_gallery import gen_gallery, downloads
+from sphinx_gallery.gen_gallery import generate_dir_rst
+from sphinx_gallery import sphinx_compatibility
 # Need to import gen_rst before matplotlib.pyplot to set backend to 'Agg'
 import matplotlib.pyplot as plt
 
@@ -111,7 +112,7 @@ def test_extract_intro():
     finally:
         os.remove(f.name)
     assert 'Docstring' not in result
-    assert result == 'This is the description of the example which goes on and on, Óscar'
+    assert result == 'This is the description of the example which goes on and on, Óscar'  # noqa
     assert 'second paragraph' not in result
 
 
@@ -177,6 +178,21 @@ def test_fail_example(log_collector):
             raise ValueError('Did not stop executing script after error')
 
 
+def test_gen_dir_rst(fakesphinxapp):
+    """Test gen_dir_rst."""
+    gallery_conf = build_test_configuration()
+    print(os.listdir(gallery_conf['examples_dir']))
+    args = (gallery_conf['src_dir'], gallery_conf['gallery_dir'],
+            gallery_conf, [])
+    out = generate_dir_rst(*args)
+    assert out[0] == ""
+    fname_readme = os.path.join(gallery_conf['src_dir'], 'README.txt')
+    with open(fname_readme, 'wb') as fid:
+        fid.write(u"Testing\n=======\n\nÓscar here.".encode('utf-8'))
+    out = generate_dir_rst(*args)
+    assert u"Óscar here" in out[0]
+
+
 def test_pattern_matching(log_collector):
     """Test if only examples matching pattern are executed"""