When it comes to stocks with consistent dividend growth, the U.S. is usually the first country that comes to mind, but investors looking to shed some home country bias while accessing stocks with impressive track records of payout growth have some options to consider.
Among exchange traded funds (ETFs) with exposure to international dividend payers, the Vanguard International Dividend Appreciation ETF (VIGI) is one of the newer options (VIGI is just over three years old), but a a compelling one nonetheless. VIGI tracks the Nasdaq International Dividend Achievers Select Index, which mandates that member firms have boosted dividends for at least seven consecutive years.
As a dividend growth play, VIGI is not likely to sport a high yield. The Vanguard fund yields 1.37 percent, well below the dividend yield on the Dow Jones EPAC Select Dividend Index.
“This low-cost fund prioritizes dividend growth over yield, which emphasizes highly profitable firms that should hold up better than most during market downturns and offer attractive long-term returns,” said Morningstar in a recent note .
Emphasizing dividend growth over yield can pay off for investors in another way. Stocks within payout growth funds often meet the criteria for the quality factor. Conversely, some high-yield stocks can be financially strained, more volatile and more likely to cut or suspend dividends than their quality growth counterparts.
After identifying ex-US stocks with at least seven straight years of higher dividends, VIGI “then applies additional filters to eliminate stocks that may not be able to sustain their dividend growth,” according to Morningstar.
These quality filters are relevant to investors considering VIGI because dividend growth outside the U.S., while potentially potent, is not always consistent in some regions.
“Emerging markets were weaker than their developed counterparts, as they were the first to feel the effects of tighter U.S. monetary policy and global trade concerns, both in their exchange rates and in company profitability,” according to Janus Henderson . “Japan and Europe performed slightly better than expected, while Asia Pacific ex Japan and the UK were in line with our forecast for low single-digit underlying growth.”
Emerging markets dividend growth, often led by the likes of China, Taiwan and, to a lesser extent, Russia, is an important consideration with VIGI because the Vanguard ETF marries developed and emerging markets exposure. Conversely, many legacy international dividend funds isolate either developed or developing economies without combining the two.
At the end of May, 23.50 percent of VIGI's 400 holdings were emerging markets equities, according to Vanguard data .
While the U.S. is setting dividend growth records, some other markets, including some countries featured in VIGI, are doing the same. For example, Canada, 8 percent of VIGI's geographic exposure, saw its dividend growth hit an all-time high in the first quarter while some European countries topped first-quarter dividend growth records, notes Janus Henderson.
“Screening for stocks with seven years of dividend growth is a strict hurdle,” said Morningstar. “This criterion captures companies that not only have the capacity to make dividend payments but also a willingness to do so. However, it does not look at other metrics, such as debt levels and analyst earnings growth estimates, which may be indicative of a firm’s capacity to continue making payments. Additionally, if a company were to miss a single dividend payment it must wait seven years before being welcomed back.”
Year-to-date, VIGI is up 19.1 percent and is outperforming the MSCI EAFE and MSCI Emerging Markets indexes while delivering less volatility than those benchmarks.