Investing with dividend-oriented picks generates a steady source of income. While many have focused on U.S. stocks, international dividend exchange traded funds also help diversify a domestically centric portfolio.
“Tilting one’s international-equity allocation to dividend-paying companies is a well-supported proposition,” according to Morningstar analyst Abby Woodham. “A strong dividend payout ratio is correlated with higher earnings growth and solid fundamentals, and several studies show that dividend-paying stocks outperform those that do not pay dividends over most time periods.” [Dividend Growth the Emerging Markets Way]
Additionally, the companies that offer consistent yields also act differently during market cycles, which also provide a layer of diversification. Over the long-term, dividend stocks help generate higher returns and help buffer volatility.
“Over the short term, capital appreciation will usually outpace the return from dividend income, but over longer time periods, dividends dominate,” Woodham added. “Dividends have historically accounted for a large component of total return, particularly in bear markets.”
Some international-focused dividend ETFs include:
The iShares International Select Dividend ETF (NYSEArca: IDV) tries to reflect the performance of the Dow Jones EPAC Select Dividend Index, which follows 100 of the highest yielding developed market stocks. IDV has a 0.50% expense ratio.
The underlying index also screens for stocks that maintained or raised dividends over the past three years, with a five-year payout that is 50% higher than the average ratio of the company’s domestic market. Stocks with the most cash dividends from the highest-yielding countries are given a larger weighting.
The ETF has 101 components, and the top holdings include Neopost 4.3%, Commonwealth Bank of Australia 3.9% and British American Tobacco 2.9%. Top sectors include financials 19.4%, oil & gas 14.8% and industrials 13.3%.
The fund’s top country allocations include Australia 18.6%, U.K. 16.1%, France 13.8%, Sweden 4.6% and Greece 5.2%.
IDV has a 4.75% 12-month yield and has increased 15.7% year-to-date.
The WisdomTree DEFA Fund (NYSEArca: DWM) tries to reflect the performance of the WisdomTree Dividend Index of Europe, Far East Asia and Australasia Index, which follows a fundamentally weighted methodology based on the performance of dividend-paying companies in developed EFEA and weights components based on annual cash dividends paid. DWM has a 0.48% expense ratio. [Bank on Europe Bank Dividends With These ETFs]
The ETF has 748 components, and the top holdings include Banco Santander 1.9%, Vodafone Group 1.9% and China Mobile 1.8%. Top sectors include financials 25.5%, industrials 11.8% and telecom services 10.4%.
The fund’s top country allocations include U.K. 20.1%, Australia 12.2%, Japan 11.6%, France 11.4% and Germany 8.2%.
DWM has a 3.49% 12-month yield and is up 16.5% year-to-date.
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own IDV.