A global approach to equity income can help investors increase portfolio yield while potentially bolstering long-term returns. The First Trust Dow Jones Global Select Dividend Index Fund (NYSEArca: FGD) is an exchange traded fund to help with those objectives.
Though FGD has a tempting yield, that does not mean there is not room for dividend growth as the ETF’s 100 holdings must “have a five-year average payout ratio of less than or equal to 60% for U.S. and European companies; or less than or equal to 80% for all other countries,” according to First Trust.
FGD has a 12-month distribution rate of 3.93%. 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.
FGD “which tracks the Dow Jones Global Select Dividend Index, marked its 10th anniversary last month. To be considered for inclusion in the index, companies must pay a current dividend, have a current-year dividend-per-share ratio greater than or equal to its five-year average ratio, and have a five-year average payout ratio of 60% or less for U.S. and European companies and 80% or less for all other countries. They must also have a three-month daily average trading volume of at least $3 million,” reports Investor’s Business Daily.
As a global ETF, FGD can hold U.S. stocks and it does to the tune of 13%. Australia is the ETF’s largest geographic exposure at 13.2%. France and Canada combine for over 22% of the fund’s weight.
If there is a drawback to FGD, it is easy to spot: The large, combined weight to telecom and utilities, even if mainly of the foreign variety, implies some of level of vulnerability to rising interest rates. High-yield stocks, particularly from those sectors, are seen as sensitive to rising interest rates. Fortunately, most developed markets outside the U.S. are not expected to raise borrowing costs next year.
Even if higher interest rates permeated developed markets, FGD could benefit because it allocates nearly 41% of its weight to the financial services sector, more than double its second-largest sector weight.
“The fund’s year-to-date return of 15.7% through Dec. 12 trails the S&P 500’s 21.1% gain. Its average annual returns over the longer haul also lag the benchmark index. But its 3.9% annualized dividend yield is well above the S&P 500’s average 1.8% payout,” according to IBD.
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