iShares International Select Dividend ETF: Best In Class, But Better Investments Exist (BATS:IDV)


Introduction

The iShares International Select Dividend ETF (IDV) is an ETF that invests in 100 of the highest yielding securities in developed countries outside of the United States. This provides investors with international exposure to dividend companies and has the potential to be a great diversification tool, but the ETF has put up rather mediocre returns for several consecutive years now, leaving investors wondering if this dividend ETF will ever perform exceptionally well.

Portfolio Construction and Holdings

IDV currently pays a distribution yield of around 6.6% before the fund’s expense ratio of 0.49%. The weighted average market cap of the fund’s holdings is $34 billion, trading at a below-market average P/E ratio of under 12, and a price to book ratio near 1.

Source: ETF.com IDV Overview

IDV’s valuation is currently below that of most markets overall, and the distribution yield is quite attractive, making this ETF a potential candidate for higher forward returns.

Taking a look at the ETF’s sector holdings shows that IDV is currently heavily invested in financials. This has been a drag on the fund recently but has substantial potential in a quick international economic recovery. Utilities are the second most heavily held sector, followed by Basic Materials, Energy, and Telecommunications Services. Consumer non-cyclicals and industrials make up around one-twentieth of the fund each before the sectors drop off to less than 2% of the fund’s holdings.

Source: ETF.com IDV Overview

As far as countries go, the fund is mostly invested in the UK and multiple European countries. Hong Kong, Australia, and Canada make up notable portions of the fund as well. Even Korea makes the list.

Source: ETF.com IDV Overview

Taking a look at IDV’s top ten holdings shows that around 32% of the fund is concentrated in the top ten companies held by the fund. This is substantial for a 100 holding fund. Rio Tinto (RIO) tops the list, with British American Tobacco (BTI) as the second-largest holding. Both of these stocks have yields exceeding 6%. British American Tobacco stock continues to decline, however, Rio Tinto has put up impressive returns lately. Several banks and energy companies are also part of the top 10, although few are likely household names for most North American investors.

Source: ETF.com IDV Overview

Comparable Peers

Comparing IDV to other international dividend ETFs puts the ETF in the middle of the pack in recent performance over the last 2.5 years. The fund is down 24%, but now has a current TTM dividend yield of 6.63%, the highest of all its peers.

ChartData by YCharts
ChartData by YCharts

Interestingly enough, the Global X MSCI SuperDividend ETF (EFAS) carried a higher yield in the past but has now dipped below that of IDV. IDV has consistently outperformed EFAS and I see no reason for this not to continue going forward. Other ETFs have outperformed IDV, (albeit it has been very close at times), but pay significantly lower yields.

Based on the ETFs displayed here, IDV appears to be the best ETF in terms of historical performance and yield. Keep in mind though that This doesn’t mean this will necessarily continue going forward.

Risks

Every investment includes risks, and IDV is certainly no exception. Here are the key risks I’ve identified going forward:

  • British American Tobacco is likely in a secular decline further accelerated by the COVID-19 global pandemic.
  • Some of the top sectors held by the fund can be highly cyclical.
  • The fund lacks growth holdings, meaning dividend growth portfolios or other strategies could continue to outperform long term.
  • A weak global economy could lead to companies cutting their dividends resulting in lower yields for investors in funds like IDV.

Conclusion

IDV appears to be a solid ETF for pure international dividend yields, but that’s about it. It has a greater trailing twelve-month dividend yield than all of its peers and has only been outperformed by funds with substantially lower yields. That said, equivalent or slightly lower yields with much higher growth in capital appreciation can be found inside the US. Funds like the Schwab U.S. dividend Equity ETF (SCHD), which tracks 100 dividend paying companies in the U.S. are a better choice in my opinion if one doesn’t require international diversification.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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