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Income-hungry investors are having a rough time right now. Interest rates are at historic lows in the U.S. Worse, Ben Bernanke and his chums at the Fed seem determined to keep rates near zero. Even threats of inflation everywhere haven’t budged Ben from his plan.
So the days of plopping your money in CDs and living off the interest are long gone.
If you’re trying to live off your nest egg, you’re probably on the prowl for higher yield. Last month I gave you Five International Bond ETFs to Look at Now. Today we’ll go a step further and look at some dividend-focused, international stock ETFs.
First, though …
Are Dividends Worth the Risk?
The dividend yield for some blue-chip U.S. stocks is very attractive compared to fixed-income instruments. The same is true overseas. Many investors think foreign stocks are strictly growth-oriented, but you can use them for income as well. The key is to be selective.
When you buy a stock with the goal of getting dividends, you need to understand that your income isn’t guaranteed. Companies can cut or even eliminate them completely. If it’s a matter of corporate survival, management has to make tough choices. For example, back in the 2008 financial crisis, the dividend was one of the first things to go at many companies.
Your principal isn’t guaranteed, either: Stock prices go down as well as up. Nevertheless, dividend stocks can be a valuable addition to any portfolio.
Next, I want to make sure you understand …
What We Mean by “Dividend Yield”
Say you have a company whose stock price is currently $100 per share. The board allocates part of the profits to shareholders as a dividend. It’s been set at 75 cents per quarter for several years now.
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| You’ll get a monthly or quarterly payment with most international dividend ETFs, but the amount may vary. |
Follow the numbers here …
You spend $100 to get a share of stock. Based on past practice, you expect to receive a 75 cent dividend four times a year. Your $100 principal is therefore generating $3 in annual income. That’s a 3 percent yield.
If you paid more or less than $100, your percentage yield will vary. Why? Because the dividend is still 75 cents ($3 per year) whether you paid $90, $100 or $110.
For instance:
- If you bought on a downturn at $90, your yield is a sweet 3.33 percent.
- But if you bought it at $110, your yield is just 2.72 percent. Not so sweet.
And don’t forget: The 75 cent dividend is not fixed. It can change, too, which would affect your yield.
Are these reasons to keep dividend-generating stocks out of your income portfolio? Not at all! They are, however, reasons to be careful. Every investment has risks — even CDs and Treasury bonds.
The best way to control risk is with diversification. Instead of loading up on a handful of stocks, look at an ETF that gives you an instant, low-cost portfolio with dozens or even hundreds of stocks.
Right now I think some of the best opportunities are in …
International Dividend ETFs
The U.S. isn’t hopeless. But the rest of the world is full of even better opportunities, which are what I seek out for my International ETF Trader members. To learn how you can join them, click here.
Most international dividend ETFs follow an index designed to cull out stocks with the best balance of growth, income, and risk. Some target various capitalization sizes while others specialize in particular regions or countries.
The following list includes some good, broad-based candidates you may want to consider.
- WisdomTree International LargeCap Dividend (DOL)
- WisdomTree DEFA Fund (DWM)
- SPDR S&P International Dividend (DWX)
- iShares DJ International Select Dividend (IDV)
- PowerShares International Dividend Achievers (PID)
The next list includes ETFs with narrower goals — either limited regions or smaller companies. These tend to have higher yields as well as more risk.
- Guggenheim ABC High Dividend Fund (ABCS)
- WisdomTree Australia Dividend Fund (AUSE)
- WisdomTree Europe SmallCap Dividend (DFE)
- WisdomTree Japan SmallCap Dividend (DFJ)
- WisdomTree International MidCap Dividend (DIM)
- WisdomTree International SmallCap Dividend (DLS)
- First Trust DJ STOXX European Select Dividend (FDD)
Finally, don’t forget about the emerging and frontier markets! You can get dividends there, too.
- WisdomTree Emerging Markets SmallCap Dividend (DGS)
- SPDR S&P Emerging Markets Dividend ETF (EDIV)
- WisdomTree Middle East Dividend (GULF)
You probably noticed many of these ETFs are from WisdomTree. That’s because dividends are their specialty, and they employ dividend weighting schemes to many areas of the market.
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| One international dividend ETF excludes financial institutions. |
For instance, if you think international financial institutions may have trouble maintaining their dividends, look at WisdomTree International Dividend ex-Financials (DOO). This ETF excludes financial companies.
As with most international investments, these ETFs also have currency risk. That means any gain in the U.S. dollar against your ETF portfolio’s home currency will work against you. On the other hand, if the dollar falls, you stand to make an additional profit.
Take a look at these 16 international dividend ETFs, and I bet you’ll find something you like. But remember to keep your holdings aligned with your individual goals and risk tolerances.
Best wishes,
Ron
