What a difference a decade makes.
Back in 2006, there wasn't a single ETF that held international stocks selected with a dividend strategy. Now advisors can help clients choose from more than 30 broad-based international and global dividend-oriented ETFs, as well as a plethora of single-country dividend funds.
Ten years ago, PowerShares International Dividend Achievers (PID) was the sole option. Since its inception in 2005, PID has had some good years, and some bad. The 2008 debacle crushed foreign stocks, and the past 12 months also have not been kind to international equities. As a result, since inception, PID has gained only 1.56% annually.
The index this fund is based on includes only stocks that have raised dividends for at least five consecutive years. One of the newest funds, the Vanguard International Dividend Appreciation ETF (VIGI) requires holdings to have a minimum of seven consecutive years of dividend growth and imposes additional proprietary, undisclosed criteria.
Nasdaq OMX Group provides the underlying benchmarks for both of these funds in its Dividend Achievers index series. For comparison, domestic Dividend Achievers indexes require 10 consecutive years of increases. A decade ago, the indexes were owned by Mergent, which sold its index business to Nasdaq OMX in 2012.
When it created the index that PID uses, Mergent wanted to employ the 10-year dividend increase requirement that formed the basis of its domestic Dividend Achievers benchmarks. There were only “a handful” of foreign companies that met the 10-year requirement, according to Mergent.
For dividend investors, the situation has improved. The Nasdaq International Dividend Achievers Select Index, which includes the VIGI, currently has 209 members. It appears that Nasdaq has had no trouble finding foreign companies that pay increasing dividends.
Why the change of heart about dividends on the part of non-U.S. companies?
Two main (and related) reasons are the extremely low yields that have been common on fixed-income investments since the financial crisis and investors’ demand for returns on their equity holdings.
While the U.S. 10-year Treasury note recently yielded a meager 1.9%, much of the world saw lower government yields for the same maturity. In the U.K. (1.47%), Germany (0.21%), Japan (-0.06%), and Switzerland (-0.44%), low or negative rates on 10-year government debt caused investors to look, in part, to stocks for income.
The plunging stock markets accompanying the financial crisis also helped convince many investors that dividend income was more reliable than capital gains that could vanish overnight. That was reinforced by recent market action in which international stocks have fared worse than U.S. equities. In the 12 months ended February 29, the MSCI EAFE index fell more than 15%.
According to the latest study of worldwide dividend trends from asset management firm Henderson Global Investors, 2015 saw $745.6 billion in dividends from outside the U.S. up from $527.3 billion in 2009. Total global dividends actually declined slightly from 2014, notes the Henderson study, mainly because of the strength of the U.S. dollar. Since the study translates results into dollars, the strength of the greenback last year trimmed about $104 billion from investor payments.
The U.S. is still the biggest payer, accounting for a little more than 35% of all dividends paid in 2015. The Netherlands showed the strongest underlying dividend growth, with payments rising 42.1% in local currency. Dividends from companies in emerging markets fell 8.3% in dollar terms, but underlying growth was 12.7% in local currencies.
Global dividends from oil companies plunged 20% last year. Although most majors maintained their dividends, many smaller energy companies cut or eliminated theirs.
Henderson projects that global dividends will increase to $1.17 trillion this year. That’s a 1.6% increase in dollar terms, but represents underlying growth of 3.3% in local currencies. And, as most advisors know, currency swings tend to even out over the long term.
Whether your clients are looking for broad-based, regional or country-specific dividend funds, there is likely an international ETF that can fill that need. Their choices include high-yield, dividend growth and total dividend funds. Foreign dividends have come a long way from 2006 when they were just a novelty.
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