International dividend-paying equities are important considerations for many income investors. They can access the asset via many exchange traded funds, including the cost-effective Vanguard International High Dividend Yield ETF (NasdaqGM: VYMI).

An easy way of looking at the Vanguard International High Dividend Yield ETF is that it is the international answer to the wildly popular Vanguard High Dividend Yield ETF (NYSEArca: VYM), one of the largest U.S. dividend ETFs.

“VYMI goes overseas in search of dividend income and what it does is it looks at the entire equity opportunity set outside the U.S. It takes the highest-yielding half of those stocks, and it folds them into its portfolio, weighting them by their market capitalization,” said Morningstar’s Ben Johnson.

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.

VYMI 1 Year Performance

VYMI’s Steady Approach

Many foreign companies tie payouts to earnings, meaning some ex-US dividend growers also have rising profitability. Those firms aren’t burdened by dividends and can sustain payouts.

VYMI holdings “might be more mature firms that tend to pay greater dividends because the reinvestment opportunities are fewer and further between. So, we like the elegance of this approach. It’s very simple. It throws off a nice yield, and it’s performed remarkably well relative to both its peers in the foreign large-value Morningstar Category as well as the category index,” adds Johnson.

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.

“When you look at it today, it’s throwing off a yield of around 3%. So, again, looking for opportunities to shield those yields from the taxman makes sense when you’re thinking about parking ETFs in an IRA. The other thing to take into account, too, is that because it invests in foreign stocks, there’s a certain percentage of those dividends that are paid out that don’t count as qualified dividend income for U.S. investors,” Johnson said of VYMI.

VYMI, which tracks the FTSE All-World ex-US High Dividend Yield Index, charges 0.27% per year, or $27 on a $10,000. That puts it toward the lower end of annual fees in the international dividend fund category.

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