If you’re a dividend investor, chances are you’re holding many of the space’s stalwarts — big, blue-chip American companies with rock-solid financials and gobs of cash that you can ride through thick and thin.
That’s good. Don’t stop doing that.
But if you’re truly looking to diversify your holdings, that also means protecting yourself against a slump in the U.S. And one of the best ways to do that is to target the same types of big, blue-chip dividend companies you like here in the States … but elsewhere on the map.
IDV – A Big, Global Cash Machine
One of the best ways to hunker down internationally is the iShares International Select Dividend ETF (IDV), a bundle of high-yielding dividend stocks from Europe, Asia, Australia and Canada.
The immediate attention-grabber is IDV’s headline yield of 4.8%, which puts it at No. 4 among all 55 developed-market funds, according to ETFdb.
But there’s also a significant nod to corporate quality. IDV is comprised of the 100 highest-yielding stocks (excluding REITs) in the Dow Jones Developed Markets ex-U.S. Index that pass muster in several screens — so these companies have paid dividends for at least a few years, are increasing dividends, have sustainable payout ratios and (like many ETFs require) have some liquidity.
This list of standards results in a set of sturdy holdings, including high weightings in telecoms such as Belgacom (Belgium), Telecom Corp. of New Zealand and Orange (France).
But there are a couple of other attractive traits that really make IDV stand out among the other developed-market funds that yield close to or more than iShares’ offering, such as the DEFA High-Yielding Equity Fund (DTH), SPDR S&P International Dividend ETF (DWX), SPDR S&P International Telecommunications Sector ETF (IST). Specifically, these two:
- This Yield’s for Real: While IDV’s 4.8% trailing 12-month yield is light-years away from IST’s 12.54% yield, investors should know that IST was helped big-time by a one-time dividend — namely, Vodafone’s (VOD) huge special dividend earlier this year after it sold its stake in Verizon Wireless to Verizon Communications (VZ). Vodafone is IST’s biggest holding, but only makes up about 0.4% of IDV.
- Sector Balance: IDV, DWX and DTH all have it — obviously, a telecom-specific fund doesn’t — but iShares International Select has the most balanced weighting of the three dividend ETFs. Specifically, it’s the only fund of the three that has double-digit weights for five sectors, and it’s just shy of a sixth. I also like that IDV is the least exposed to financials. Sure, many international banks have been forced to shore up their balance sheets (like their American counterparts), but financials still are “early cyclicals” and tend to lead the market down. If we’re playing it safe, IDV’s smaller exposure is the way to go.
One thing you might notice about IDV is that it has grossly underperformed similar U.S. dividend funds such as the iShares Select Dividend ETF (DVY) and the SPDR S&P Dividend ETF (SDY). Over the past five years, IDV has put up a total return of 75% vs. SDY’s 113% and DVY’s 128%.
However, that relative underperformance is a reflection of how U.S. stocks have broadly outperformed international stocks over the past five years. If you compare these dividend funds’ returns to more typical stock funds from their respective regions, you see that IDV has actually held up extremely well.
If I had to find one thing to nit-pick about IDV, it’d be the outsized exposure to Australia; while DWX and DTH both weight Australia No. 2 at around 16% each, Australian companies make up 21% of the IDV’s holdings. And the only concern here is just how heavily tethered Australia’s economy is to China — but heck, that certainly has worked to the country’s advantage so far this year.
Otherwise, IDV’s makeup is fairly similar to the other dividend ETFs, with significant allocations to the major western and northern European countries and Canada. Certainly not bastions of mega-growth — just developed economies that shouldn’t drop off the map. For an income fund’s purposes, that suits me just fine.
There’s no single thing in which I would say IDV stands out as an “A+” in — a couple international funds do yield higher, and it’s cheap at 0.5% in expenses, but DWX is cheaper at 0.45%.
But as a whole, IDV outshines the competition, delivering broad, inexpensive international exposure, fund diversity, stability and a pretty healthy yield.