If you're seeking steady income from your investments, good luck finding it in traditional U.S. index funds tracking the S&P 500. The current dividend yield on that tech-stock-laden benchmark is only 1.1%.
Yes, there are solid U.S. stock dividend-focused exchange-traded funds like Vanguard High Dividend Yield Index, which has a 2.2% trailing 12-month yield, and Schwab US Dividend Equity, which yields 3.1%. But both pay less income than the Vanguard International High Dividend Yield Index ETF, which yields 3.5% over the same period. It also sports a 14% five-year annualized return versus the Vanguard's U.S. dividend ETF's 12.2% and Schwab's 9.5%, with international stocks beating U.S. ones over that period.
That said, international stocks have paid higher dividends than their U.S. counterparts for many years. One reason is different sector concentrations overseas. "A lot of U.S. companies are high-growth tech companies where they're doing share buybacks" instead of paying dividends, says Ryan Mischker, co-manager of the ALPS International Sector Dividend Dogs ETF, which has a healthy 4.2% trailing 12-month yield and strong long-term returns. "In international markets, you're looking at more seasoned companies paying dividends. Especially in developed markets, there are more mature financial, industrial, energy type of sectors."
The $191 billion iShares Core MSCI EAFE ETF, a popular index fund, has only a 11% tech weighting versus the S&P 500's 39%. The ETF doesn't strategically target dividends yet still has a 3.4% yield. The Vanguard International ETF has only a 5% tech weighting, with 44% in higher-yielding financial-services companies such as banks and insurers. This makes it a good diversifier for U.S.-centric investors heavily invested in tech stocks.
Still, having too much sector concentration can lead to lagging performance in growth-led market environments favoring historically low-dividend-paying sectors. One smart thing the ALPS ETF does is equal-weighting its sectors and stocks. "We have 10 sectors, each with five companies, equal-weighted, and we also have a country cap of a maximum of 10 names per country," Mischker says. The ETF buys the five companies in each sector with the highest dividend yields every December, then rebalances that portfolio of 50 stocks every quarter to stay equal-weighted. Recent winners are a diverse lot -- Norwegian energy company Equinor, French bank BNP Paribas, and Japanese drug company Astellas Pharma -- all up more than 40% in the past year.
Yet yield-chasing -- buying companies with the highest dividend yields -- can be dangerous. Sometimes they're the weakest companies, and cheap for good reason. While it helps that the ALPS ETF is diversified so that no single stock blowup can take the fund down, a strategy that seeks both dividends and high-quality companies can prove more defensive.
Arguably, the best international dividend fund for conservative investors is the Franklin International Low Volatility High Dividend Index ETF. It has produced a 17.1% five-year annualized return, besting 98% of its peers in Morningstar's foreign large value category, and an 11.2% 10-year return, besting 92% of them. Even more impressive, it has done this with much less volatility and downside risk, having a maximum drop of 10% in the past five years versus 23% for the average category fund. Its 3.7% trailing yield isn't the highest, but it's still attractive.
Todd Mathias, Franklin Templeton's head of U.S. ETF product strategy and development, says the ETF's success at playing defense depends on a three-pillar approach. First, the ETF screens the international stock universe for "sustainable high dividends from companies that can maintain that dividend payout and have support of earnings to maintain that payout." The second pillar is low stock-price volatility, and the third is hedging foreign currency exposure. The currency hedge "isn't a call on the dollar or on international currencies; it's that currency adds volatility, and by hedging that out, you reduce overall total risk, " Mathias explains.
A typical holding for this ETF is Italy's Banca Monte dei Paschi di Siena. The world's oldest bank, it currently yields 7.7%. After a tumultuous period in Italy's banking sector in the 2010s, Banca Monte now has stable earnings and has pledged to pay out 16 billion euros ($18.4 billion) in dividends in the next five years. "After the financial crisis, there was a lot of scrutiny on Italian banks, and they've really turned around what their credit looks like," Mathias says. "It has gone from an impaired sector to an income engine."
One noteworthy detail: With dividend stock funds, it's better to compare their trailing 12-month yields than the one-month "SEC yields" typically used for bond funds, as many dividend funds don't have steady fixed payout rates like bonds. One month's worth of information can be misleading, as a fund can pay more some months and not others.
There aren't many actively managed international dividend ETFs or mutual funds. Columbia International Equity Income is one, with a relatively low 0.45% expense ratio. Co-manager Henry Hom also seeks high-quality dividend payers. "The main part is free cash flow," he says. "If a company can generate a healthy cash flow, then it should be able to pay its dividend."
High free cash flow also keeps companies from taking on too much leverage to sustain their payouts, a common cause of dividend cuts. Some recent additions to the Columbia ETF's portfolio with such high-quality metrics are French digital-advertising company ( and recent Barron's pick ) Publicis Groupe, yielding 4%, and Danish brewer Carlsberg, at 3%.
Blue-chip companies with yields like that are harder to find in the U.S.
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