Where do you invest if you’re looking for both growth and income? For the past several years, the market’s answer has been dividend-paying equities. That’s particularly been the case in the United States, where investors seeking alternatives to the paltry, Fed-suppressed yields on bonds have pushed up prices on traditional dividend sectors like financials and telecom.
Lately, however, the U.S. dividend gravy train has gotten more crowded. With the climb in equities, dividends are looking more expensive. The yield on the S&P 500 Index has been trending lower, from 2.18 percent two years ago to 2 percent today (source Bloomberg, as of 8/31). At the same time, bond yields have been trending upward to more normalized levels as the Fed takes its foot off the monetary pedal.
Investors have been looking abroad to expand and diversify their growth and income opportunities. While many international markets have also surged, we believe stocks may have more room to run overseas, with dividend yields that are sometimes substantially higher than those in the United States.
In 2017 so far, $968mm has flowed into internationally focused dividend exchange-traded funds (ETFs), a 59 percent increase from all of 2016. Given net outflows in U.S.-focused dividend funds, 121 percent of the inflows in all dividend funds (iShares domestic and international ETFs) have come from internationally focused dividend ETFs, which is up from 15 percent of the inflows in 2016 (source BlackRock, as of 8/31).
How To Choose The Right ETF
As with all investment decisions, some due diligence is in order. There are many ETFs to choose from, but funds that look similar “on the label” can differ significantly inside the bottle. In the international dividend space, for example, portfolios can vary by regional tilts, stylistic differences and objectives, depending on the ETF provider and the underlying index. For this asset class especially, the devil is in the details.
Here are three things to consider when choosing an international dividend ETF:
1. How does the fund screen for dividends?
There are certain constants across dividend-focused ETFs. Almost all of them screen for companies that are generating earnings for their corporate activity, consistently pay dividends from that activity and do not have wild variations in those payments. Generally speaking, these are stable, established companies that have shown they can weather different business environments.
For example, the iShares International Select Dividend ETF (IDV), applies screens to ensure not only that companies have paid dividends in each of the previous three years, but that the previous year’s dividend-per-share ratio is greater than or equal to its three-year average. It also screens out stocks that have a negative trailing 12-month earnings record.
2. Which countries are included?
ETFs provide access to a broad array of international markets and market segments, which means that advisors can plug-and-play different funds to match their clients’ portfolio goals. While IDV covers international developed markets, there are also dividend funds that focus on emerging markets or specific regions, which offer different risk/return profiles. The iShares Emerging Markets Dividend ETF (DVYE) and the iShares Asia/Pacific Dividend ETF (DVYA) are two examples.