At a time of paltry bond yields throughout the developed world, income investors are turning to equities and for those looking for some extra yield, ex-U.S. developed markets make a lot of sense.
The ALPS International Sector Dividend Dogs ETF (NYSE: IDOG) can be viewed as a yield-driven alternative to more traditional developed market benchmarks, but the ALPS exchange traded fund easily wins the yield tussle. IDOG's current dividend yield of 5.49%, well ahead of the 3.10% on the MSCI EAFE Index.
The $228.4 million IDOG follows the S-Network International Sector Dividend Dogs Index, giving it a similar methodology to ALPS' other famed “dogs” ETFs. Essentially, that methodology is to find the five highest-yielding from 10 of the 11 GICS sectors (real estate is excluded) and equally weight those stocks. Sectors are also equally weighted.
Why It's Important
About 30% of IDOG's geographic weight it allocated Japan and Australia. Though interest rates have steadily declined in Australia in recent years, the market remains home to one of the highest dividend yields in the developed world (almost 4% on the MSCI Australia Index) and dividend growth there has been sturdy.
Conversely, Japan isn't a high-yielding market, but it has been one of the most prodigious growers of dividends among developed markets in recent years. Plus, Japanese companies boast massive stockpiles of cash, giving IDOG an aura of dividend growth and safety.
However, Europe with attractive and high yields, could be a boon for IDOG. The ETF allocates about 65% of its weight to 10Western European markets.
In Europe and the U.S., “the cash yield in equities remains far above the yield on risk-free bonds," according to Goldman Sachs. "In Europe's case, this gap is higher now than at any time since the financial crisis."
On a domestic basis, high dividend stocks are often richly valued, presenting investors with a cost of admission for the above-average yields and defensive traits. European high dividend fare, however, is more attractively valued and likely a value destination.
IDOG's sector composition allows it to seize upon value opportunities while not being overweight expensive sectors. And, if nothing else, the fund could be a better deal than European corporate bonds.
“Almost 100%" of European companies have a dividend yield greater than their corporate bond yield,” according to Goldman Sachs.