Is it time to seek ETF dividends overseas?
It has been a spectacular decade for U.S. equities. Over the 10 years ended April 30, the S&P Composite 1500 index of large- mid- and small-cap stocks posted an annualized total return of 15.34% vs. 7.75% for the MSCI All Country World ex-U.S. Index benchmark.
The old Wall Street adage that “trees don’t grow to the sky” is worth citing. The next 10 years likely will likely show somewhat different rankings. Advisors looking to rebalance equity positions may want to consider dividend-focused ETFs that look outside the United States. In choosing the candidates below, we eliminated portfolios that targeted a specific capitalization size as well as those that limited themselves to high-yield equities.
We’ve restricted our discussion to funds with more than $100 million in AUM. Each of the following ETFs draws from the total international market, both developed and emerging segments. Here are the details on three ETFs that passed our screens:
FlexShares International Quality Dividend Index Fund (IQDF, expense ratio 0.47%) has $837 million in assets and 170 holdings. IQDF, launched in April 2013, is based on an index that features only dividend-paying stocks that have been screened for multiple factors, including profitability, management expertise and cash flow. The portfolio leans toward large-cap value stocks, but includes mid-cap (29.44%) and small-cap (7.48%) issues. Financial stocks (22.85%) form the largest sector concentration, followed by industrials (10.34%) and consumer discretionary (10.10%) issues. Slightly more than 20% of holdings are from emerging markets, with the remainder from developed areas. By country, U.K. stocks are the biggest bet, at 13.98%, of the portfolio. Japan (13.86%) and China (7.48%) are next in line. Morningstar sees IQDF’s forward dividend yield at 7.73%. For the year through May 7, the portfolio has returned 9.75%, while the one-year performance is negative (-7.07%). Annualized three- and five-year returns are 6.18%, and 0.11%, respectively.
Invesco International Dividend Achievers ETF (PID, 0.55%), which came public in September 2005, is the granddaddy of international stock dividend funds. The 63-stock portfolio is based on an index that requires companies to have five consecutive years of dividend increases. PID, which has $752.3 million in assets, is approximately 79% invested in developed countries, with the rest in emerging markets. Financials (18.48%), communications services (13.75%), and industrials (13.24%) are the heaviest sector concentrations. Canada leads the list of countries emphasized with 42.96% of the portfolio with the U.K. (19.753%) and Russia (8.46%) following. Surprisingly for a fund labeled international, 7.56% of holdings are domiciled in the U.S. That could be a deal breaker for advisors looking to avoid overlap. Forward yield, as estimated by Morningstar, is 5.49%. YTD through May 7, PID returned 14.16%, with 5.91% for one year. Annualized returns for three, five, and 10 years are 8.89%, 0.49% and 7.69%, respectively.
Vanguard International Dividend Appreciation ETF (VIGI, 0.25%), only around since February 2016, has $1.1 billion in assets. VIGI is based on an index that requires companies to have posted seven consecutive years of dividend growth. REITs are excluded. At the end of March (Vanguard delays posting holdings until 15 days past the end of the month), VIGI’s stock holdings were approximately 76% in developed markets, with the rest in emerging markets. The 402-stock portfolio had its largest concentrations in technology (19.56%), consumer defensive (17.11%) and financial (14.12%) stocks. By geography, developed Europe (38.19%) housed the largest group of equities followed by emerging Asia (19.29%). Morningstar projects VIGI’s forward dividend yield at 2.08%. For 2019 through May 7, VIGI returned 12.99%. The ETF’s one- and three-year annualized returns were 1.29% and 8.59%, respectively.