While international equities aren’t getting the headlines their U.S. counterparts command, there are reasons to revisit the asset class and the FlexShares International Quality Dividend Index Fund (NYSEArca: IQDF) is positioned as a compelling solution for that purpose.
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.
Adding to the case for international stocks, particularly the IQDF strategy, is that international firms carry less debt than their American rivals.
“Overall, U.S. companies carry more debt than international ones. The companies in the S&P 500 have average debt/capital ratio of 45.4% versus just 32.6% on average for companies in the MSCI All-Country World ex USA Index,” writes Morningstar analyst Kevin McDevitt. “The gap isn’t quite as big when looking at financial leverage (that is, the equity multiplier), which measures the degree to which a company is financed by shareholders’ equity. The greater the number, the more a company is financed by debt. The S&P 500’s average financial leverage is 5.0 versus 4.8 for the MSCI ACWI ex USA.”
Inquire Into IQDF
IQDF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust International Quality Dividend IndexSM. The index reflects the performance of a selection of companies that, in aggregate, possess greater financial strength and stability characteristics relative to the Northern Trust International Large Cap Index, a float-adjusted market-capitalization weighted index of non-U.S. domiciled large- and mid-capitalization companies.
“While all this borrowing has led to a spike in the S&P 500’s average debt/capital, that ratio has been flat for the MSCI ACWI ex USA. The gap between the two has widened considerably since early 2015 when U.S. issuance really took off and issuer quality also began to decline,” according to Morningstar.
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.
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.
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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.