Quality is a pivotal trait for dividend investors and one that takes on added importance when venturing outside the U.S. Fortunately, the FlexShares International Quality Dividend Defensive Index Fund (NYSEArca: IQDE) helps investors access steady ex-US dividend growth without taking on unnecessary volatility.
The quality dividend ETF 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.
IQDE, which is seven years old, follows the Northern Trust International Quality Dividend Defensive Index. That index provides exposure to high-quality, income-monitored portfolios of non-U.S. international equities that are weighted by targeted overall beta between 0.5 and 1.0 times that of the Parent Index, dividend yield, quality factors, and lower total risk.
Inquiring Into IQDE
IQDE holds 186 stocks and sports a tantalizing trailing 12-month dividend yield of 6.31% or more than triple what investors get on the S&P 500.
With so many ex-US developed markets considered undervalued relative to the S&P 500, it’s not surprising that IQDE carries a value tilt as over half its components are classified as value stocks. Japan, the U.K., and Switzerland combine for roughly 36% of the fund’s geographic exposure.
Value investing is a popular long-term investment strategy. Value stocks have historically outperformed growth stocks, or companies with high earnings expectations, in almost every market over the long-haul, but that has not been the case for more than a decade.
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.
Adding to the case for IQDE, eEx-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.
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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.