Ex-US developed equity markets are lagging the S&P 500 and other major domestic benchmarks this year, but some market observers are betting that scenario could reverse in 2020. Investors looking to position for that reversal while participating in the value offered by developed markets outside the U.S. may want to consider dividend funds.
That includes the FlexShares International Quality Dividend Defensive Index Fund (NYSEArca: IQDE). IQDE is up 8.11% this year and lobs off an impressive dividend yield of 5.06%.
Ex-U.S. developed market dividend payers often feature larger yields than their U.S. counterparts, an assertion proven by comparing large- and mega-cap dividend stocks from familiar dividend sectors such as consumer staples, energy, financial services and telecommunications.
Low interest rates in the U.S. have sent investors flocking to dividend stocks and ETFs in recent years. 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 ETFs.
IQDE allocates almost 60% of its weight to large-cap stocks but its mid-cap exposure of just over 30% is above the category average. Additionally, IQDE has a value tilt as 46.47% of its 175 holdings are classified as value stocks, nearly quadruple the percentage of growth stocks found in the fund.
The quality dividend ETFs specifically screen for management efficiency, profitability and cash flow. Each company has to show management efficiency or firms that efficiently deploy capital and make smart financing decisions. Companies with wider profit margins are better positions to grow and maintain dividends than those with slimmer margins. Additionally, firms that can meet debt obligations and day-to-day liquidity needs are better capable of maintaining dividends.
Stocks in Europe and in international developed markets often have higher yields than those in the U.S. That means it’s possible to take advantage of a dividend growth strategy and relatively high dividend yields. International dividend growth stocks also come without the added U.S. interest rate sensitivity of high dividend paying stocks.
The quality factor is based on profitability, efficiency, earnings quality and limited leverage, which have historically been a good way to separate good companies from weaker ones.
For more on smart beta ETFs, visit our Smart Beta Channel.
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.