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Dividend Investing Ideas Center

Regional Dividend ETFs You Should Know About

Tanmoy Roy Jan 27, 2016


Last month, I wrote about some interesting dividend indices that investors should know about. It offered some regional diversification options (e.g. Asia, EPAC regions). As a follow-up, I will discuss some investment options using dividend indices.


ETFs Might Be the Way to Go for Dividend Investors


Investing based on dividends is a good long term strategy. It can serve well for investors who don’t want to take unnecessary risk to their portfolio. If, however, investors are picking individual stocks (no matter how good the analysis is), they might inadvertently end up adding risk to their portfolio. This is especially true for individual investors who have limited time to research—sometimes they invest reacting to the news, sometimes they invest based on the sectors they understand. Either way, they are exposed to the risk of trying to beat the market. Market efficiency ensures all stocks are fairly priced so chasing market events doesn’t work most of the time. On the other hand, if they invest based on sectors and indices (and broad trends), they gain from an automatic diversification and it is easier to pick indices than stocks.

If you want to invest in indices, there are three ways to do it:

  1. Build a portfolio based on indices. This will prove expensive as you will have to enter individual trades for each stock and also maintain the % contribution portfolio from time to time.
  2. Buy mutual funds that are based on indices. This is certainly an attractive option and until the early 90s was the only option to invest based on an index. These have lower management fees than normal mutual funds and it’s completely passive. Also, there are a fairly large variety of mutual funds to choose from.
  3. Buy ETFs that track indices. ETFs achieve pretty much the same thing but come out cheaper than funds. There are also crucial tax advantages that ETFs have over index funds. That is because ETFs are created and structured differently than mutual funds. In fact, with ETFs, you can easily take short positions too.

To learn more, read “How Inverse Commodity ETFs Work”.


Investing in Dividend Based Indices Using ETFs


Given how efficient ETFs are for passive investing, it makes a lot of sense to consider ETFs for investing in indices. The following ETFs will give investors some options to invest in global dividend indices (made up of high paying dividend stocks) outside of the U.S.

Dow Jones Asia/Pacific Select Dividend 30 Index – iShares Asia/Pacific Dividend ETF (DVYA)

iShares has an ETF (DVYA) that seeks to track the above index. Currently trading at more than 40% below its 2013 high, it might be an attractive option. Of course, currently volatility is a huge concern, and on top of that, you have to factor in the sectors that these stocks come from (sectors and regions). The top two sectors for this index are financial services and communications (by weight), and they have not done as badly as some of the other sectors. A major area of concern in the current scenario is the energy sector, which constitutes only 5% of the index. Stocks in this index are mostly from Australia, Hong Kong and New Zealand, and come from the Financials/Industrials/Telecom sectors. Australian companies dominate this index and so does the financial sector. DVYA, which seeks to track the above index, is currently trading at more than 40% below its 2013 high. Among the ETFs being listed here, this has the lowest monthly trading volume. The lower the trading volume, the harder it is to get a true price while buying or selling the ETF.

This has an annual dividend yield of 5.81%.

Dow Jones Emerging Markets Select Dividend Index – iShares Emerging Markets Dividend ETF (DVYE)

Stocks in this index are mostly from Asia—Taiwan, Brazil, China, South Africa and Thailand. There is an equal parts distribution between developed and developing Asian economies. Interestingly enough, India and Russia form less than 4% of the index. There is a heavy bias towards South Asian markets and they often move together, which needs to be taken into account. In terms of sectors, they come from real estate and technology. Utilities and energy, which have been under pressure in the past year, form only 15% of the index. DVYE, the ETF tracking the index, is more than 54% down from its end of 2012 highs. This is primarily because of the Chinese market sell-off last year. It has above average trading volume so it may not be a problem to buy and sell at a good price.

Not only is it more than 50% down, this has a big annual dividend yield of 7.12%. Both of these factors make the ETF an attractive (Asia-heavy, emerging markets) choice for investors.

Dow Jones EPAC Select Dividend Index – iShares International Select Dividend ETF (IDV)

If you want dividend stocks outside of the U.S. but don’t want to venture towards Asia, then this index is a good option. Europe and Australia form nearly all of the index. IDV, an ETF that tracks this index, is down by 38% since its highs not long ago in early 2014. Financial services forms most of the index but the bad news for 2016 is that energy, materials and utilities form a massive 32% of the index. Given the demand and supply projections for 2016, this ETF might go down a bit further. In terms of liquidity, things don’t get any better than this ETF. There is plenty of it and investors will not have a problem getting the right price for the buys and sells.

It has an annual dividend yield of 5.53%.

Dow Jones Global Select Dividend Index – DJ Global Select Dividend Index Fund (FGD)

If investors are looking for an index that’s full of exciting dividend paying stocks and that doesn’t take the U.S. out of consideration, FGD is a good option. The U.S. forms only 18% of the regional weight, with Europe and Australia forming more than 60%. So, if you are getting an Asia-heavy ETF, this non-Asia and minor-U.S. index could be a good addition to the portfolio. There is above average trading volume, so investors are covered as far as getting a good price. The thing that concerns me is that energy, utilities and materials form 34% of the portfolio. Given the supply glut and lower than usual demand for 2016 predictions, 2016 might be rough for this ETF.

It has an annual dividend yield of more than 5.38%.


The Bottom Line


Having dividends as a central strategy doesn’t mean you can ignore capital appreciation/depreciation possibilities. Getting a 7% dividend serves little purpose if there is a 20% loss in value. The flip side of the argument is—if you do own some positions that have lost value, getting a decent dividend takes a bite out of the pain. Looking for individual stocks that fit well inside your portfolio is tedious, and also not the best strategy when you don’t have a lot of time to continuously research. Index investing, on the other hand, gives investors the right exposure at an affordable risk. As far as passive investing is concerned, ETFs have many advantages over Index Funds. The ETFs described in this article will hopefully give investors an insight into some high-dividend, index investment options outside of the U.S.

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