Ex-U.S. developed markets equities and the related exchange traded funds typically boast higher dividend yields than comparable U.S.-focused offerings, but knowing that is only half the battle for income investors seeking international diversification.
Investors should be selective with their approaches to international dividend-payers and look for a combination of robust yields, potential for lower volatility and payout growth opportunities. The ALPS International Sector Dividend Dogs ETF (NYSEArca: IDOG) is an example of an ETF that checks those boxes.
IDOG, which is almost nine years old, follows the S-Network International Sector Dividend Dogs Index. That benchmark lives up to the standard of offering a higher dividend than rival U.S. fare.
“The difference in yields becomes more obvious when looking at dividend indexes. The S-Network Sector Dividend Dogs Index (SDOGX)—a domestic equity income index—has a five-year average yield of 4.5% compared to the S-Network International Sector Dividend Dogs Index (IDOGX)—a developed international equity income index—which has a five-year average yield of 5.2%. The countries currently represented in IDOGX all have higher average dividend yields compared to the U.S.,” notes Alerian analyst Roxanna Islam.
IDOG’s components and sector exposures are equally weighted, reducing concentration risk at the holdings and sector levels. The ETF’s geographic exposures are not equally weighted. In this case, that’s just fine because some ex-U.S. developed markets are more known for dividends than others.
On the yield front, IDOG allocates over 30% of its combined weight to the U.K. and Australia. An almost 19% allocation to Japanese stocks indicates that IDOG has some leverage to sources of quality dividend growth.
IDOG’s methodology “reduces concentration to sectors like financials and healthcare, which are heavily weighted in broader international dividend indexes. The strategy is constructed to pick stocks with the highest dividend yields (assumed to be the cheapest in their sector) with the assumption that prices will appreciate throughout the year and revert to the mean,” adds Islam.
IDOG currently yields 3.55%, or 127 basis points in excess of the MSCI EAFE Index. Plus, IDOG is trading higher on a year-to-date basis while the MSCI EAFE Index is off 7.36%. That’s confirmation that dividends matter.
Other international developed market dividend ETFs include the FlexShares International Quality Dividend Dynamic Index Fund (NYSEArca: IQDY), the ProShares MSCI EAFE Dividend Growers ETF (CBOE: EFAD), and the SPDR S&P International Dividend ETF (NYSEArca: DWX).
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.