Japan Exposure Meaningful for This International Dividend ETF

This year, dividends are under duress in the U.S. and the same is true of some international markets. Investors looking for durable, quality payouts outside the U.S. may want to consider the FlexShares International Quality Dividend Index Fund (NYSEArca: IQDF).

One of the obvious points in IQDF’s favor is its 16.41% weight to Japan, which is among the highest among international dividend ETFs.

“Japanese companies have long been criticized for hoarding too much cash. Now the habit is being touted as a reason to buy Japan stocks, as the coronavirus pandemic dims the outlook for dividend returns elsewhere,” reports Bloomberg.

Investigating IQDF

IQDF screens 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.

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. IQDF’s Japan exposure could prove beneficial to investors in a volatile dividend environment. As a low-yield nation, Japan has the capacity to drive dividend growth.

“Lack of capital efficiency, leading to excess cash, has long been cited as a problem for Japanese firms and a reason to undervalue their stocks,” according to Bloomberg. “Topix-listed firms held 493 trillion yen in cash as of their latest filings, a 75% jump from five years ago, according to data compiled by Bloomberg. Prime Minister Shinzo Abe has been pushing for better stewardship and governance practices since he took office in 2012. Now, the combination of improved dividend payouts and the strong cash balance is being seen as a possible tailwind.”

Using the FlexShares Dividend Quality Score (DQS), as represented in an ETF such as IQDF, can help investors find reliable ex-US equity income.

“For international dividend payers, the DQS score evaluates dividend-paying equities across all of these lenses, ranks companies on a sector basis, and evaluates firms on both a regional and sector basis. This not only ensures an ‘apples-to-apples’ comparison – profiling like firms against each other – it also serves to identify quality companies in every sector and country, supporting diversification through the construction process and opportunity set,” according to FlexShares.

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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.