Many have jumped on to the relatively more attractive international equities market in an extended bull market environment, and income-minded investors have even joined the fray, targeting the more attractive yield opportunities. However, international dividend payers come with their own set or risks, so it may be prudent to consider a quality dividend exchange traded fund strategy when looking into foreign market exposure.
“Often, a seemingly generous dividend yield may actually signify a weak share price tied to negative news not yet revealed in the quarterly dividend. This explains why we believe investors in international dividend stocks must be confident that the dividend being paid is sustainable over the long term, meaning that the payout is well covered and the payer company has the potential to grow it over time,” FlexShares said in a research note.
Driving the ongoing shift toward international dividends, an aging U.S. population seeking dividend income for their golden years has driven up valuations on many traditional dividend payers above their long-term averages. Consequently, more are turning to dividend stocks in both developed and international markets where there they are still showing historically high dividend yields.
However, investor should still do their due diligence when selecting international dividend stocks to limit risks. Consequently, FlexShares argued that dividend investors should look to a company’s core financial health to better evaluate the likelihood that it will continue to increase its future dividends.
For instance, FlexShares’ line of quality dividend international ETFs, like the FlexShares International Quality Dividend Index Fund (NYSEArca: IQDF), FlexShares International Quality Dividend Defensive Index Fund (NYSEArca: IQDE) and FlexShares International Quality Dividend Dynamic Index Fund (NYSEArca: IQDY), incorporate various screens to separate the wheat from the chaff. IQDF shows a 3.58% 12-month yield, IQDE has a 3.44% 12-month yield and IQDY comes with a 3.22% 12-month yield.
“With this approach, the reliance on publicly available financial data means new dividend payers can be evaluated similarly to stocks that have paid dividends for decades. By using several lenses to evaluate the actual financial health of the organization, the FlexShares’ Dividend Quality Score (DQS) is designed to provide insight into how well positioned a dividend-paying company is for success, and how protected future dividends are under current market/economic environments,” according to FlexShares.
Specifically, the quality dividend ETFs 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.
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.