International Dividend ETFs: A Fiscal Cliff Survival Tool?
An ominous tone set by the fiscal cliff has grown louder since Election Day.
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 US equities have been hammered in the past week.
Since November 7, the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG), the SPDR S&P Dividend ETF (NYSEARCA:SDY), and the iShares High Dividend Equity Fund (NYSEARCA:HDV) have lost an average of 4.2%. 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 (NYSEARCA: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 US dividend-paying stocks, the aforementioned ETFs and related funds. Although payout ratios at US 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 US 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 US 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 (NYSEARCA:IDV): The iShares Dow Jones International Select Dividend Index Fund is not a perfect "avoid the fiscal cliff" play. It has a 22% 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% of the fund's weight.
Remember, it is ETFs that are heavy on US-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 US tax change is unlikely to see less demand for its stock."
Translation: The fiscal cliff may prompt a US-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 (NYSEARCA: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% allocation to utilities names is not a red flag, because international utilities trade at much lower valuations than their U.S. counterparts.
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