International dividend ETFs: Fiscal cliff survival tools?

Investors should consider these exchange-traded funds in case US lawmakers can't reach a deal.

By Benzinga Nov 16, 2012 2:01PM

Image, Dollar bills floating over U.S. Capitol copyright CorbisBy The ETF Professor

Increasing concern about the fiscal cliff since Election Day is the primary excuse behind the recent declines endured by dividend exchange-traded funds (ETFs). Popular, multi-sector dividend ETFs focused on U.S. equities have been hammered in the past week.

Since Nov. 7, the Vanguard Dividend Appreciation ETF (VIG), the SPDR S&P Dividend ETF (SDY) and the iShares High Dividend Equity Fund (HDV) have lost an average of 4.2%. Things are worse for some so-called dividend sector funds, such as those tracking telecommunications and utilities names. As one example, the Utilities Select Sector SPDR (XLU) is off 6% since the elections.

Despite compelling evidence that doomsday will not arrive if the dividend tax rate rises, investors have been punishing U.S. dividend-paying stocks, many ETFs and related funds. Although payout ratios at U.S. firms are historically low and high-yielding stocks rose in the decade following the last dividend tax increase in 1993, investors are no longer convinced that domestic dividend names are worth the risk.

International dividend stocks and ETFs might just be the elixir income investors are looking for to deal with the fiscal cliff. Because "international investors are not affected by changes in U.S. tax rates and dividend yields are still attractive in the current environment, we do not anticipate a broad-based flight from global dividend-paying companies stemming from the U.S. Fiscal Cliff," said PIMCO in a research note.

Here is a sampling of some of the globally focused dividend ETFs investors should consider if we go over the fiscal cliff:

iShares Dow Jones International Select Dividend Index Fund (IDV

This not a perfect "avoid the fiscal cliff" play, with a 22% allocation to the financial services sector and a beta of almost 1.5. However, IDV is sufficiently allocated to conservative sectors such as consumer staples, utilities and telecommunications. That trio represents over 38% of the fund's weight.

Remember, ETFs that are heavy on U.S.-based utilities, and to a lesser extent telecoms, are most vulnerable to the fiscal cliff. PIMCO paints the picture: "For example, a Latin American utility with shareholders from Europe, Asia and the Middle East unaffected by the possible U.S. tax change is unlikely to see less demand for its stock."

Translation: The fiscal cliff may prompt a U.S.-based utility to become suddenly stingy with its dividend. That does not mean a European or Latin American utility will do the same.

WisdomTree International Dividend ex-Financials Fund (DOO

Not only is this an ex-financials ETF, it is also an ex-U.S. ETF. DOO's 14.4% allocation to utilities is not a red flag, because international utilities trade at much lower valuations than their U.S. counterparts.

DOO's 30-day SEC yield of 4.77% is certainly alluring, but the primary risk to this ETF is its large exposure (over 45%) to eurozone nations. Still, select European equities are attractively valued and many of DOO's Europe-based constituents derive much of their revenue from other parts of the globe.

WisdomTree Emerging Markets Equity Income Fund (DEM

Emerging markets firms are upping their dividend game this year, with payouts from the 300 largest non-bank stocks in the MSCI Emerging Markets Index expected to rise to $52.2 billion from $48.9 billion last year.

High profitability and low corporate debt bolster the case for emerging markets dividend payers and ETFs such as DEM. So does the fact that U.S. tax policy likely will not factor prominently in a Polish or Thai company's dividend decisions.

There is another reason DEM could work as a fiscal cliff play: State-owned enterprises. Some of these are already decent dividend payers, but since their largest shareholders (the home government) often want more money, there is the potential for dividend growth.

Along those lines, investors should also evaluate the EGShares Low Volatility Emerging Markets Dividend ETF (HILO). Both DEM and HILO offer ample exposure to various state-controlled companies.

Global X SuperDividend ETF (SDIV

This devotes about 29.3% of its weight to U.S. equities, but many of which are real estate investment trusts obligated by law to pay out a certain percentage of their profits in the form of dividends. That might not be enough to assuage some investors that SDIV is immune to the fiscal cliff.

Still, SDIV features plenty of positive traits extending beyond a 7.72% 30-day SEC yield and a monthly dividend. SDIV is diverse and less volatile than other international dividend funds. With a price-to-earnings ratio of less than 12 and a price-to-book ratio of 1.14, SDIV is not richly valued.

And while SDIV offers exposure to both developed and developing markets, its eurozone exposure is not enough to be a major cause for concern. SDIV's recent pullback seems to be a case of too much too fast; below $21, this ETF is a steal.

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