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Dividends And Value: An International Affair

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Ex-US developed markets stocks are struggling this year. As of Sept. 19, 2018, the widely followed MSCI EAFE Index is lower by 3.63%. The same is true of developed markets value strategies as the MSCI EAFE Value Index is also in the red on a year-to-date basis.

With ex-US developed markets, which are believed to be safer bets than emerging markets, trailing the S&P 500 and other major domestic equity benchmarks, investors may be inclined to increase domestic allocations at the expense of international exposure.

Increasing the inherent home market bias puts investors at risk of missing a developed markets rebound, an important point when noting leadership historically rotates between domestic and international equities. For example, prior to the global financial crisis (2003-2009), the MSCI EAFE Index and the MSCI Emerging Markets Index topped the Russell 1000 Index. Since 2010, domestic equities have consistently outperform international equivalents.

Perhaps chastened by the financial crisis, investors have ratcheted down exposure to international equities. Data confirm as much. An interesting data point is the skittishness toward ex-US stocks displayed by younger investors. Since the 2009, the reduction in international equity exposure by investors under 35 years old is more than double that of investors in the 35 to 50 demographic.1

Using Dividends To Rediscover International Stocks

Dividend-paying equities can be valid reentry points for pensive investors evaluating developed markets outside the U.S. For the three years ended Aug. 31, 2018, the S-Network International Sector Dividend Dogs Index delivered considerable out-performance relative to the MSCI EAFE Value Index and the Nasdaq Index International Dividend Achievers Index. Over that period, the S-Network International Sector Dividend Dogs Index was also less volatile than those competing benchmarks.

The S-Network International Sector Dividend Dogs Index is a value benchmark, but even with that value proposition, the index offers some leverage to favorable dividend growth trends.

“Global dividends jumped 12.9 percent year-on-year in the second quarter to $497.4 billion, hitting a new record, according to a report on the Janus Henderson Global Dividend Index,” reports CNBC.2

While the U.S. is often the engine of global dividend growth, second-quarter payout growth was robust in Europe, even when factoring currency depreciation against the U.S. dollar. European countries setting dividend growth records in the second quarter include Belgium, Denmark, France, Germany, the Netherlands and Switzerland. Those countries combined for 21.43% of the S-Network International Sector Dividend Dogs Index at the second quarter.

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Value Remains

Steady dividend growers, be they domestic or international developed markets companies, often have alluring traits investors readily embrace. Those characteristics include low debt-to-equity ratios, strong return on equity and invested capital and, of course, commitment to shareholder rewards.

Investors are often willing to pay up for those traits, but that does not mean there are not value opportunities throughout the universe of developed market dividend stocks. Swiss pharmaceuticals giant Roche AG is a reliable dividend grower with a value feel.

“We think the market underappreciates Roche’s drug portfolio and industry-leading diagnostics, which conspire to create sustainable competitive advantages,” said Morningstar. “As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global healthcare into a safer, more personalised, and more cost-effective endeavor. The collaboration between its diagnostics and drug-development groups gives Roche a unique in-house angle on personalized medicine.”3

Tobacco stocks may be out of favor in the U.S, but the U.K.’s Imperial Brands is a potentially undervalued name with access to an emerging growth theme.

“Imperial is the unloved stock in a sector that is very much in favor,” according to Morningstar. “The market is valuing tobacco stocks based on their exposure to heated tobacco, the emerging category that is achieving impressive growth in Japan and select markets around the world. We are bullish on heated tobacco, and we think a valuation premium for those leading and developing the category is appropriate.”

Where International Dividends And Value Meet

The ALPS International Sector Dividend Dogs ETF (IDOG) tracks the aforementioned S-Network International Sector Dividend Dogs Index, equally weighting sectors and individual holdings, a methodology that potentially steers investors away from overvalued stocks. As of Sept. 19, 2018, Roche and Imperial Brands combined for 4.41% of IDOG’s weight.

1 Source: Fidelity July 2018 https://www.fidelity.com/mymoney/investing-in-international-stocks
2 Source: CNBC Aug. 20, 2018 https://www.cnbc.com/2018/08/20/global-dividends-jump-to-record-high-in-the-second-quarter.html
3 Source: Morningstar July 2, 2018 http://www.morningstar.co.uk/uk/news/168606/5-undervalued-european-stocks.aspx/
Important Disclosures & Definitions
An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus which contain this and other information call 866.675.2639 or visit www.alpsfunds.com. Read the prospectus carefully before investing.
Standardized performance for the ALPS International Sector Dividend Dogs ETF (IDOG) can be found here. Current holdings for IDOG can be found here.
ALPS International Sector Dividend Dogs ETF Shares are not individually redeemable. Investors buy and sell shares of the ALPS International Sector Dividend Dogs ETF on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
The content and opinions expressed in this article are that of the author and not the views and opinions of ALPS Advisors, Inc. In addition, ALPS Advisors, Inc. assumes no responsibility to ensure the accuracy of the content written by the author.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus.
The Fund is subject to the additional risks associated with concentrating its investments in companies in the market sector.
Diversification does not eliminate the risk of experiencing investment losses.
The Fund’s investments in non-U.S. issuers may involve unique risks compared to investing in securities of U.S. issuers, including, among others, greater market volatility than U.S. securities and less complete financial information than for U.S. issuers. In addition, adverse political, economic or social developments could undermine the value of the Fund’s investments or prevent the Fund from realizing the full value of its investments. Financial reporting standards for companies based in foreign markets differ from those in the United States. Finally, the value of the currency of the country in which the Fund has invested could decline relative to the value of the U.S. dollar, which may affect the value of the investment to U.S. investors.
The S-Network International Sector Dividend Dogs NTR Index (IDOGX) is a portfolio of stocks derived from a universe of mainly large capitalization stocks domiciled in developed markets outside the Americas (the “S-Network Developed Market (ex NA) Index”). The IDOGX methodology selects the five stocks in each of the ten GICS sectors that make up the universe which offer the highest dividend yields as of the last trading day of November. The fifty stocks that are selected for inclusion in the portfolio are equally weighted. An investor cannot invest directly in an index.
The MSCI EAFE NR (Net Return) Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries.
The MSCI EAFE Value NR (Net Return) Index captures large and mid-cap securities exhibiting overall value style characteristics across Developed Markets countries around the world, excluding the US and Canada.
The MSCI Emerging Markets NR (Net Return) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
Janus Henderson Global Dividend Index – The first of its kind, quarterly, long-term study into global dividend trends, it analyses dividends paid by the 1,200 largest firms by market capitalization. It is a measure of progress that global firms are making in paying their investors an income on their capital.
Russell 1000 Index – The Russell 1000 index consists of the largest 1000 companies in the Russell 3000 Index. This index represents the universe of large capitalization stocks from which most active money managers typically select. The index was developed with a base value of 130 as of December 31, 1986.
Nasdaq International Dividend Achievers Index- is a modified equal dollar weighted index, determined by yield, designed to track the performance of dividend paying ADRs and non-U.S. common or ordinary stocks trading on NYSE, NASDAQ, AMEX. Base of 1000 as of 1/31/95.
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS International Sector Dividend Dogs ETF.
DOG000797 3/31/2019
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