An ETF For High Quality International Income

The primary draw to international dividend stocks and exchange-traded funds is that these securities usually sport higher dividend yields than their the U.S. counterparts. That is true of the iShares Dow Jones EPAC Sel Div Ind (ETF) IDV.

IDV, which debuted nearly nine years ago, has a trailing 12-month dividend yield of almost 5.4 percent. That is well above what investors will find on the vast majority of U.S.-focused dividend ETFs. Due its dividend emphasis, IDV is somewhat of a narrowly focused ETF as it is home to just 100 stocks with Australia and the U.K. combining for over 47 percent of the fund's geographic weight.

“Australian companies tend to pay out high dividends, whereas Japanese companies tend to pay out low dividends, relative to the global average. As a result, this fund has generally had a large allocation in Australia (20 percent to 30 percent, versus around 6 percent for the MSCI World ex USA Index) and a very low weighting in Japan (currently less than 1 percent, versus 20 percent for the benchmark). At times, these differences can drive this ETF's out- or underperformance relative to category peers,” said Morningstar in a recent note.

Related Link: The Quest For Quality Dividends

Weight And Allocations

On the surface, it would appear that IDV's large combined weight to Australian and British stocks is risky because falling commodities have prompted dividend cuts among energy and materials firms in those countries with more negative dividend action in both regions expected. However, the energy and materials sectors represent just 20.5 percent of IDV's overall weight and not all of those names hail from Australia or the U.K.

Conversely, about a third of IDV's combined weight is allocated to the financial services, consumer staples and healthcare sector, which have been dependable dividend growers at the international level. As IDV is not a currency hedged ETF, investors benefit if currencies such as the Australian dollar and British pound rise against the greenback. Importantly, IDV's payout has been on a steady upswing in recent years.

“During the past few years, this fund's annual dividends per share have been on a steady upward trend, starting at $1.06 in 2009 and rising to $1.93 in 2014. However, the recent 10 percent decline in the Australian dollar to the U.S. dollar in 2015 may have a negative impact on the total dividends paid in 2015, as dividends are distributed in local currency to the ETF and converted into U.S. dollars before being paid out to shareholders,” according to Morningstar.

The ETF, which has a three-year standard deviation of 14.6 percent, could see the trajectory of its payouts challenged if the dollar rises in earnest.