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Better Returns, Positive Signs Make These Dividend ETFs Attractive Again


Momentum is shifting from domestic to international dividend-paying stocks.

It has been a strong year of gains for domestic dividend-paying stocks with the iShares Select Dividend ETF (NYSEARCA:DVY) posting returns of over 17% so far in 2013. Money has flowed into the US market and fed this momentum, which has caused both developed international and emerging market countries to lag behind. However, that trend may be changing as we have recently seen a renewed surge in dividend-paying stocks of overseas companies.

Both the iShares International Select Dividend ETF (NYSEARCA:IDV) as well as the iShares Emerging Markets Dividend ETF (NYSEARCA:DVYE) have picked up steam and appear to be poised for an extension higher. In fact, IDV just recently broke above its May high, which is a positive sign for the 102 stocks that make up this divided machine. Since hitting a low in June, IDV has surged over 13% which has outpaced its domestic rivals.

Investors are starting to see value in this space as tensions over a Middle East conflict have been quieted for the time being. In addition, we may be seeing some rebalancing and diversification away from domestic stocks and into international companies with more attractive valuations.

One of the benefits of owning international dividend equity ETFs is that they typically have higher yields than an equivalent domestic counterpart. The current yield on IDV is 4.55%, while DVYE sports a similar 4.37% dividend rate. That is a full percentage point higher than the 3.55% yield on DVY which is an attractive quality for income seekers. Like most stock funds, these dividends are paid quarterly to shareholders.

The drawback is that a higher yield typically carries a higher risk, as additional volatility will likely be attached to the underlying stocks in these funds. Emerging market countries in particular have been besieged this year by currency devaluations which have acted as a headwind for upside growth.

I am still cautious about the potential for additional volatility in the market during the month of September as investors digest the uncertainty of global conflict, Federal Reserve actions, and future economic growth. Stocks have been amazingly resilient this year, but any unexpected new headlines could disrupt this uptrend.

If you currently have exposure to international or emerging market dividend ETFs, I would continue to hold those positions with cautious optimism right here. If fundamentals continue to improve overseas, we will likely see additional outperformance from this segment of the economy versus domestic stocks.

Read more from David Fabian, Managing Partner at Fabian Capital Management:

How to Play the Sweet Spot in High-Yield Bonds

Waiting for the Turn in Emerging Markets

Will It Be a September to Remember?

Twitter: @fabiancapital
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