A Cost-Effective Idea For International Dividends

Plenty of dividend investors know about the Vanguard Dividend Appreciation ETF VIG, the largest domestic dividend exchange traded fund by assets. VIG has a noteworthy international counterpart: the Vanguard International Dividend Appreciation ETF VIGI.

What Happened

VIGI, which is more than three years old, follows the NASDAQ International Dividend Achievers Select Index. Components in the international payout fund must have minimum dividend increase streaks of seven years, less than the 10 years required by the domestically-focused VIG's underlying index.

VIGI “applies additional filters to eliminate stocks that may not be able to sustain their dividend growth,” said Morningstar in a recent note. “The index weights its holdings by market capitalization to help mitigate turnover and trading costs. It also limits individual stocks to 4% of the portfolio at the annual rebalance to improve diversification.”

Why It's Important

VIGI is home to 400 stocks and the fund's selection universe includes developed and emerging markets equities, making the all-country world ex-U.S. indexes relevant comparisons. Year-to-date, the Vanguard fund is beating the MSCI ACWI ex USA Index by 643 basis points.

VIGI devotes 23.50% of its weight to emerging markets stocks and nearly 48% of its weight to European equities, according to issuer data. Those allocations, particularly the hefty Europe exposure, give the fund something of a value tilt because developing economies and European stocks trade at significant discounts to U.S. equity benchmarks.

“Overseas companies that have a history of increasing their dividend payments are also likely to be those that have been consistently growing profitably,” said Morningstar. “These stable businesses should be less volatile than the broader market and are likely to hold up better during market downturns.”

What's Next

VIGI has potential for long-term investors seeking international exposure, but there are some risks with this fund.

“Screening for stocks with seven years of dividend growth is a strict hurdle that provides a big advantage,” according to Morningstar. “It indirectly targets companies that not only have the capacity to make dividend payments but also a willingness to do so. But this screen does have some downsides. It doesn’t consider other metrics, such as debt levels and analyst earnings growth estimates, which may be indicative of a firm’s capacity to continue making payments.”

Morningstar has a Bronze rating on VIGI.

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