Country stock funds can be another smart way to target and diversify a dividend approach. Many of these individual markets have generated higher yields than the United States—in fact, there are as many as 15 country ETFs with higher yield than the 10-year Treasury bond. This may be due to a country’s particularly strong dividend culture (e.g., Australia, with a 4.4 percent yield in the MSCI Australia Index) or the types of companies that dominate an index (e.g., Russia, yielding 5.13 percent in the MSCI Russia Index) (Source: MSCI, as of 8/31).

Obviously, the risks will vary as well. It’s quite common for country funds to show large sector concentrations, which are oftentimes very different from the United States. For example, the MSCI Russia Index has a 60 percent weight to energy and materials, while the MSCI Australia Index has a 42 percent weight to financials. (In contrast, the S&P 500’s biggest weighting is to information technology, at 23.5 percent) (Source: Bloomberg, as of 8/31). Be aware that sector differences can impact the dividend. (Sources MSCI and S&P)

Speaking of risk, one common aspect of international stocks is currency, or FX, risk. If you want exposure to the market, but are concerned about the impact from currency, consider countries like Saudi Arabia, whose currencies are pegged to the U.S. dollar, and aim to maintain a consistent relative value.

3. Are you targeting high or growing dividends?

Finally, you’ll want to look at the type of growth profile you want. Funds seeking high dividends will likely invest in more stable or mature companies with high cash flow but less growth potential. They’re often in sectors like banks or utilities, although dividends are becoming more common even among “growth-y” technology companies.

Other ETFs focus on growing dividends. For example, the iShares International Dividend Growth ETF (IGRO) screens for companies that are beginning to consistently grow the capital they return to shareholders in a sustainable and consistent manner. While both IDV and IGRO focus on companies with positive bottom lines, IGRO seeks to find companies with five years or more of annual dividend growth, while excluding those with a dividend payout ratio above 75 percent. It also screens out the top decile of yield payers in an effort to avoid future yield traps, tilting it toward more equal weights. In portfolio terms, this can help make the fund less risk-averse than a high-dividend ETF, typically with more holdings, and a higher percentage of stocks in the Morningstar growth category.

A stream of cash dividends, regardless of where they’re sourced, can help anchor a portfolio when stock prices fluctuate. That said, a central tenet of international investing is that an investor is bearing the economic risks—and potential rewards—associated with and unique to various countries and regions. These countries’ primary products, trade patterns, currency movement and policy shifts, are all factors that will differ from the exposures that dividend screens of U.S. stocks alone can provide. These variations are the crux of diversification, and can be considered by investors looking to add growth potential and manage risk in a portfolio.

Tushar Yadava is a U.S. iShares investment strategist. The iShares Funds are distributed by BlackRock Investments.

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