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.
An option to consider among international dividend ETFs is the iShares International Select Dividend ETF (CBOE: IDV). IDV requires that components be taken from developed countries in Europe, Pacific, Asia and Canada. Securities must also meet dividend payout consistency and growth metrics, along with profitability and minimum liquidity levels. Holdings are then weighted by dividend yield.
The $4.7 billion IDV is 10 and a half years old. IDV’s portfolio is focused relative to standard, cap-weighted international ETFs as the dividend fund holds just 98 stocks. IDV tracks the Dow Jones EPAC Select Dividend Index.
“The most common international index funds are not the best way to capture forward international earnings, in my opinion,” according to a Seeking Alpha analysis of international dividend ETFs. “This is because they are almost all weighted strictly by market capitalization. It’s fine for domestic indices to do that, but it creates unique problems when international multi-country indices do that. Specifically, it concentrates your holdings into just a few countries, which defeats the purpose of international diversification in the first place.
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, including IDV.
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IDV allocates over 38% of its combined weight to the U.K. and Australia, two of the best ex-US dividend growth markets. Additionally, Australia is one of the highest-yielding developed markets. France and Italy, two of the three largest Eurozone economies, combine for almost 18% of IDV’s roster.
IDV is top-heavy at the sector level with over 31% of its weight allocated to financial services stocks, but some ex-US bank stocks have been performing well this year as highlighted by a year-to-date gain of 13.4% for IDV.
The ETF allocates over of its weight to the utilities, energy and telecom sectors. Outside the U.S., those sectors typically sport higher dividend yields than their U.S. counterparts, in part explaining, IDV’s dividend yield of about 3.9%. That is double the dividend yield on the S&P 500.
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