After a pullback in September, U.S. equity markets are up this month, at least so far. Investors remain jittery about what may be next for their equity portfolios in the days ahead.
In particular, fixed income investments could become imperiled. Interest rates are at historic lows, and the U.S. economy's trajectory remains less than certain. In times like these, seasoned investors realize the importance of creating—and protecting—a passive income stream, especially for long-term goals, such as retirement.
Previously we discussed the value of dividend stocks in a portfolio. Today, we'll extend the discussion to two more exchange traded funds (ETFs) that focus on dividend investing.
Companies Have Been Axing Dividends
In the early days of the pandemic, a large number of firms either decreased or fully suspended their payouts and share buyback programs. Several well-known companies in this group include Boeing (NYSE:BA), Carnival (NYSE:CCL), Delta Air Lines (NYSE:DAL), Halliburton (NYSE:HAL), Marriott International (NASDAQ:MAR) and Wells Fargo (NYSE:WFC).
However, there are still many firms that offer respectable dividends. But before investors hit the buy button to grab fat yields, it is important to remember not all dividends are created equal. A robust balance sheet and a strong level of dividend coverage—known as a payout ratio, the ratio of a company’s annual earnings to the amount paid out in dividends—would be important to have.
As a rule, companies with stable payout ratios over time are better able to meet their dividend obligations. In addition, as the ratio percentage approaches 100%, it indicates the company requires a greater percentage of its earnings to meet the dividend commitment. Extremely high ratio percentages, and especially those over 100% should be regarded as a bright red flag.
For instance, in early 2019, UK-headquartered telecom giant Vodafone's (NASDAQ:VOD) dividend yield was more than 9%, an amount that attracted a large number of investors. And even though its free cash flow was at a 23% level, the telecom company had a high level of debt. In May of 2019, the company cut its payout by 40%.
Thus, market participants should do proper due diligence to lower their chances of walking into a value trap. Put another way, if a dividend yield looks too high to be sustainable, it probably is. Many analysts concur: dividends provide quite an objective measure of a firm's overall health and profitability.
Those investors who are not fully able to sort through fundamental data to analyze the health of a company's dividend structure may instead find an ETF with a dividend focus appealing. More than likely, fund managers and index creators would do at least some of that important homework.
With that background information, here are the two funds for today.
1. iShares International Select Dividend ETF
Current Price: $25.64
52 Week Range: 19.52-34.12
Dividend Yield: 7.15%
Expense Ratio: 0.49%
This fund concentrates on businesses headquartered outside the U.S. The iShares International Select Dividend ETF (NYSE:IDV) provides exposure to relatively high dividend-paying established companies in other developed markets.
IDV, which has 92 holdings, tracks the Dow Jones EPAC Select Dividend Index. EPAC stands for "Europe, Pacific, Asia and Canada," which covers developed markets excluding the U.S. The fund has been trading since 2007.
Financials (30.39%) top the list of sectors, followed by Utilities (20.14%), Materials (12.70%), Communication (8.80%), Industrials (7.67%), Energy (7.37%) and Consumer Staples (4.54%). The top 10 holdings make up around a third of IDV’s net $3.3 billion in assets.
Several of the companies most are likely to be familiar with include Rio Tinto (NYSE:RIO), British American Tobacco (NYSE:BTI), Commonwealth Bank of Australia (OTC:CMWAY), ACS Actividades De Construccion Y Servicios (OTC:ACSAY), Hang Seng Bank (OTC:HSNGY) and SwissCom (OTC:SCMWY).
Year-to-date, IDV is down about 24%. However, after hitting a multi-year low in March, the fund has gone up by 30%. Its trailing P/E and P/B ratios stand at 10.83 and 1.05, respectively. As a result, contrarian investors may begin to find value in this ETF.
2. WisdomTree U.S. MidCap Dividend Fund
Current Price: $30.62
52-Week Range: $20.07 - $38.74
Dividend Yield: 3.27%
Expense Ratio: 0.38%
Earlier in the week, we looked at the mid-capitalization space. Now, we have a fund that provides exposure to U.S.-based dividend-paying mid-cap businesses. The WisdomTree U.S. MidCap Dividend Fund (NYSE:DON), which has 334 holdings, tracks the WisdomTree U.S. MidCap Dividend Index. It started trading in 2006.
The top 10 holdings constitute more than 10% of DON’s net assets, which stand around $2.5 billion. Food and beverage manufacturer JM Smucker (NYSE:SJM), public utility CenterPoint Energy (NYSE:CNP), investment manager Franklin Resources (NYSE:BEN), paper and packaging firm WestRock (NYSE:WRK) and food manufacturer Campbell Soup Company (NYSE:CPB) top the list of firms in DON.
The fund's top sector allocation is Financials (22.69%), Real Estate (14.64%), Industrials (13.48%), Consumer Discretionary (10.52%), Utilities (10.49%), Materials (10.18%) and Information Technology (7.40%),
Since the start of the year, the fund is down almost 20%. The ETF may appeal to those with an income focus who would like to have access to companies with growth potential.