International Dividend ETFs: A Fiscal Cliff Survival Tool?
An ominous tone set by the fiscal cliff that has grown louder since Election Day is the primary excuse behind the recent declines endured by dividend ETFs. Popular, multi-sector dividend ETFs focused on U.S. equities have been hammered in the past week.
Since November 7, the Vanguard Dividend Appreciation ETF (NYSE: VIG), the SPDR S&P Dividend ETF (NYSE: SDY) and the iShares High Dividend Equity Fund (NYSE: HDV) have lost an average of 4.2 percent. Things are worse for some so-called dividend sectors funds, such as those tracking telecommunications and utilities names. As one example, the Utilities Select Sector SPDR (NYSE: XLU) is off six percent since November 7.
Despite the presentation of compelling evidence that doomsday will not arrive if the dividend tax rate rises, investors have been punishing U.S. dividend-paying stocks, the aforementioned ETFs and related funds. Although payout ratios at U.S. firms are historically low and high-yielding stocks rose in the decade following last dividend tax increase in 1993, investors are no longer convinced that domestic dividend names are worth the risk.
International dividend stocks and ETFs might just be the elixir income investors are looking for to deal with the fiscal cliff. Because "international investors are not affected by changes in U.S. tax rates and dividend yields are still attractive in the current environment, we do not anticipate a broad-based flight from global dividend-paying companies stemming from the U.S. Fiscal Cliff," said PIMCO in a research note.
Here is a sampling of some of the globally-focused dividend ETFs investors will want to have a look if the fiscal cliff morphs from bad dream to harsh reality.
iShares Dow Jones International Select Dividend Index Fund (NYSE: IDV) The iShares Dow Jones International Select Dividend Index Fund is not a perfect "avoid the fiscal cliff" play. A 22 percent allocation to the financial services sector and a beta of almost 1.5. However, IDV is sufficiently allocated to conservative sectors such as consumer staples, utilities and telecommunications. That trio represents over 38 percent of the fund's weight.
Remember, it is ETFs that are heavy on U.S.-based utilities, and to a slightly less extent telecom names, that are most vulnerable to the fiscal cliff. PIMCO paints the picture: "For example, a Latin American utility with shareholders from Europe, Asia and the Middle East unaffected by the possible U.S. tax change is unlikely to see less demand for its stock."
Translation: The fiscal cliff may prompt a U.S.-based utility to become suddenly stingy with its dividend. That does not mean a European or Latin American utility will do the same.
WisdomTree International Dividend ex-Financials Fund (NYSE: DOO) Not only is the the WisdomTree International Dividend ex-Financials Fund an ex-financials ETF, it is also an ex-U.S. ETF. DOO's 14.4 percent allocation to utilities names is not a red flag, because international utilities trade at much lower valuations than their U.S. counterparts.
DOO's 30-day SEC yield of 4.77 percent is certainly alluring, but the primary risk to this ETF is its large weight (over 45 percent) to eurozone nations. Still, select European equities are attractively valued and many of DOO's Europe-based constituents derive sizable portions of their revenue from other parts of the globe.
WisdomTree Emerging Markets Equity Income Fund (NYSE: DEM) Emerging markets firms are upping their dividend game this year with the expect payouts from the 300 largest non-bank stocks in the MSCI Emerging Markets Index expected to rise to $52.2 billion $48.9 billion last year.
High profitability and low corporate debt bolster the case for emerging markets dividend payers and ETFs such as DEM. So does the fact U.S. dividend tax policy likely will not factor prominently in the decision of a Polish or Thai company's dividend decisions.
There is another reason DEM could work as a fiscal cliff play: State-owned enterprises. As in some state-owned firms are already decent dividend payers, but since their largest shareholders (the home government) often want more money, there is the potential for dividend growth.
Along those lines, investors should also evaluate the EGShares Low Volatility Emerging Markets Dividend ETF (NYSE: HILO). Both DEM and HILO offer ample exposure to various state-controlled firms.
Global X SuperDividend ETF (NYSE: SDIV) The Global X SuperDividend ETF does devote about 29.3 percent of its weight to U.S. equities, but many of those are real estate investment trusts that are obligated by law to payout a certain percentage of their profits in the form of dividends. That might not be enough to assuage some investors that SDIV is immune from the fiscal cliff.
Still, SDIV features plenty of positive traits and those traits extend beyond a 7.72 30-day SEC yield and a monthly dividend. SDIV is diverse and less volatile than other international dividend funds. With a price-to-earnings ratio of less than 12 and a price-to-book ratio of 1.14, SDIV is not richly valued.
And while SDIV offers exposure to both developed and developing markets, its eurozone exposure is not significant to be a major cause for concern. SDIV's recent pullback seems appears to be a case of too much too fast and below $21, the ETF is a steal.
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