With central banks throughout the developed world paring rates and engaging in monetary easing, government bond yields are falling, giving investors good reason to consider international dividend exchange traded funds.
The international dividend ETF conversation should include the First Trust Dow Jones Global Select Dividend Index Fund (NYSEArca: FGD). As its name implies, FGD is a global ETF, meaning it can hold U.S. stocks and the ETF does to the tune of a 15.4% weight. That makes the U.S. FGD’s second-largest country weight behind Australia.
Australia, Canada, France, Germany, Japan and the U.K. are the major developed markets where 10-year bond yields currently reside below the dividend yields on benchmark equity indexes. Though FGD holds no German or Japanese stocks, Australia, Canada, France and the U.K. combine for 53.5% of the ETF’s weight. [Temptation of International Dividend ETFs]
Last year, on a regional basis, North American dividends rose 15% to $392 billion, but U.K. firms once again offered excellent dividend growth. Payouts there surged 31% to $135 billion, according to Henderson Global Investors. FGD sports a trailing 12-month yield of almost 5.1%, about 160 basis points more than the comparable yield on the MSCI EAFE Index.
Though FGD has a tempting yield, that does not mean there is not room for dividend growth as the ETF’s 100 holdings must “have a five-year average payout ratio of less than or equal to 60% for U.S. and European companies; or less than or equal to 80% for all other countries,” according to First Trust.
There is some risk with FGD’s heavy Australia exposure.
“Slumping commodities prices mean that the Australian companies will be unable to defend their dividend policies this year and the dividend ETFs will take a hit, according to Aviate Group‘s Robert Buckley,” reports Shuli Ren for Barron’s.
However, the concern surrounding Australian dividends mainly centers around mining stocks and the materials sector represents just 2.7% of FGD’s weight. Most of the ETF’s Australian holdings are financial services names where dividends are expected to remain solid this year. [Australia for the Patient Investor]
Still, Australian stocks are expensive, at least according to Goldman Sachs.
“Finding value in the Aussie equity market has never been harder; at an average of 19x forward P/E, Industrial stocks have never been this expensive: Growth had already re-rated, but now even ‘cheap’ stocks trade at unprecedented multiples; Seeking defensives with some valuation support, we upgrade Staples to Overweight from Neutral,” said the bank in a recent note.
If there is a drawback to FGD, it is easy to spot: The large, combined weight to telecom and utilities, even if mainly of the foreign variety, implies some of level of vulnerability to rising interest rates. High-yield stocks, particularly from those sectors, are seen as sensitive to rising interest rates. Those sectors combine for over 27% of the ETF’s weight. Most of FGD’s U.S. holdings are utilities stocks. Financial services and energy names combine for 34.5% of FGD’s weight.
First Trust Dow Jones Global Select Dividend Index Fund
