International dividend ETFs deliver a triple bang for your buck: income, potential for capital growth, and portfolio diversification against market risks.
Foreign emerging and developed markets tend to get overlooked in investors' hunt for income. That can be a mistake.
Almost 75% of the world's publicly traded companies are found outside the U.S. Many of these are top-tier stocks, boasting attractive dividends.
"In today's environment of low bond yields and challenged equity returns, many investors are looking for ways in which they can carefully balance income and growth," said Robert Nestor, head of iShares' strategic beta product segment. Seeking out international opportunities is a key way to achieve this, he suggested.
Several exchange traded funds target international dividend-paying companies. The largest of these include iShares International Select Dividend ( IDV ), WisdomTree Emerging Markets High Dividend ( DEM ) and SPDR S&P International Dividend ( DWX ), which hold nearly $5 billion combined.
International dividend indexes are relatively new and have track records of less than 10 years, according to Morningstar Inc. "As such, they are not really tried and tested," analyst Patricia Oey wrote in February.
Three new ETFs expand investors' choices for investing in high-quality international dividend payers:
- IShares International Dividend Growth ( IGRO ) invests in companies based in both foreign developed markets and emerging markets with healthy balance sheets, a record of increasing dividends for five straight years and the potential for sustainable earnings growth. Its holdings include Royal Bank of Canada ( RY ), an IBD Dividend Leader that boasts growing dividends as well as steady profits.
Dividend growth historically has been a key driver of long-term returns. The longer an investor holds an equity, the more important dividend growth becomes to overall performance, according to Nestor. Moreover, dividend growers tend to be mature companies that experience steep price drops less often than smaller, weaker companies do. Keep in mind there's a trade-off for the low volatility of dividend ETFs : plodding performance.
IGRO has $4.68 million in assets and a 0.22% expense ratio. Its 3.75% yields puts the focus on total return. By comparison, sibling iShares International Select Dividend yields 5.37% for a more aggressive approach to income.
That older and larger peer also has a higher 0.50% expense ratio and zero exposure to emerging markets (EM).
- WisdomTree Emerging Markets Dividend Fund (DVEM) includes South Korea and Taiwan within the EM bucket, giving them hefty portfolio weightings together with China. Holdings must pass certain market-cap-size and liquidity screens. Sector and country weightings are capped at 25% to mitigate risk.
Emerging markets hold strong dividend potential, according to WisdomTree. It says nearly 93% of EM companies paid at least one dividend in the year ended March 31.
WisdomTree Emerging Markets Dividend tracks a dividend-weighted index. That indexing method may boost the effect that dividends have on performance.
DVEM has $2.5 million in assets and a 0.32% expense ratio. It has a 3.59% SEC 30-day yield.
- WisdomTree International Quality Dividend Growth (IQDG) focuses almost entirely on foreign developed markets. It has hefty stakes in Japan and the United Kingdom. In the past week, its performance has been hit by investor worries over the odds of the U.K. exiting from the European Union -- a Brexit.
WisdomTree employs an unusual "forward-looking process" to seek dividend growth. Stocks are selected based in part on long-term expectations for earnings growth, rather than looking for a history of dividend increases in years past.
Companies expected to grow earnings faster may hold greater potential to increase future dividends, according to WisdomTree. It says that backward-looking screens may miss out on developing growth opportunities.
IQGD has $2.43 million in assets, a 0.38% expense ratio and a 2.02% SEC 30-day yield.