Looking for Yield?
As readers will have seen from the stock market forecasts for 2012, the range of possible outcomes are unusually wide. Some are extreme. It follows, therefore, that the Individual Investor ought to be broadly and globally diversified … with a tilt toward the defensive. With so much uncertainty surrounding ‘growth-oriented’ assets, risk-averse investors continue to emphasize ‘income-oriented’ assets. But the list is running short.
What about dividends? The iShares.ca Dow Jones Canadian Dividend ETF (XDV) yields barely 4%. (Dividends for Canadian investors at least are tax advantaged). (Dan Hallett had an excellent article in the Globe and Mail, “Distribution rate does not equal yield“).
Or should investors instead look to low(er) valuation opportunities?
To find yield, investors may have to look Overseas.
According to the iShares.ca index returns calculator, MSCI EAFE was down -16% over the 6 months to year-end and MSCI Emerging Markets was down -18%. Valuations (prices) have been beaten down. As a result, the Standard and Poor’s International Dividend Opportunities index now yields between 6% and 7%.
To evaluate this ‘Opportunity’, like any investment, investors could look at … Risk, Return, Tax and Cost.
It’s always about risk.
The S&P International Dividend Opportunities index construction methodology screens potential candidates by size (minimum $1B in market capitalization). Each stock must have three years of dividend growth and 3 years of earnings growth.
It (the index and the ETF) measures the performance of the 100 highest dividend-yielding stocks in this ‘International’ (Ex-U.S.) Universe. And it looks reasonably diversified. The top 10 holdings are about 26%. Top 5 country weights are about 44%. 50% of industry holdings are Telecommunications Services and Utilities. The top 4 sectors are Telecommunications, Utilities, Financials and Consumer Discretionary (73% of holdings). Canadian content is about 4%. (LabradorIronOre, Pembina Pipeline, Transalta, Shaw, Just Energy Corp.). The Canadian names aren’t overly familiar. The non-Canadian names aren’t household names either. (Tele2 AB? Fred Olsen Energy?). (Investors find comfort in familiarity. Nice home-grown names like RIM, Nortel, Laidlaw, Loewen Group … comfortable disasters. That’s why we buy ETF’s … to avoid individual stock blow-ups). Anyway …
Valuations Overseas have been beaten down. (See above). Lower prices mean higher yields. Still 6% to 7%?
It must have something to do with risk.
There is always the risk of dividend cuts. And there is always the risk of a broad market correction. Dividends, however, help to buffer an investment somewhat in a downdraft.
Low price and high yield can mean that there is the risk of a ‘value trap’ … where the price is beaten down but for good reason. Often that reason is a reflection of limited future prospects. Investors ought to be aware of this before diving in. (High yield, low price-to-earnings, low price-to-book-value among other value ratios do not mean a stock is a ‘value’ stock. An analyst must also assess if there has been a fundamental shift in the company’s business or environment to determine if the troubles are temporary or permanent). Can all 100 stocks in DWX be ‘value traps’? Again, this is why investors are attracted to ETF’s … instead of individual stocks.
Yield is 6% to 7% but what about protection of capital? See also Risk above.
Can a risk-averse investor ignore a potential market downdrafts while they collect their dividends?
Non-Tax-sheltered (Non-RSP, non-TFSA, etc.) investors will recognize that International dividends don’t qualify for the Canadian Dividend Tax credit so there is no preferential tax treatment on dividend income from DWX.
MER of the DWX ETF is 0.45%.
DWX appears to be a diversified, high yield bet. But, like all investments, it is not without risk.
I do not own DWX but it is on my buy list.
————————————————–Next time? More Risk Management. Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan