What’s up in Europe?

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banknotes_and_coinsIn two words, cash flow.  And not just in Europe.  Record high dividend payments are a worldwide phenomenon and are occurring despite doom and gloom reports about Europe in the popular media.  Healthy dividend yields on non-US ETFs raise a good question: should you own them?

Cash flow is knowable

A quick scan of popular ETFs shows how rich some non-US ETFs equity yields really are.  For purposes of comparison Vanguard’s VGK (500 largest stocks in Europe – I call them the “big uglies”) has a dividend yield of 3.5 percent.  Wisdom Tree’s DLS, 4.7 percent, and State Street’s FEZ 3.3 percent.  By comparison the 10-year US Treasury yield is 2.8 percent.  (And the yield on SPY, a S&P 500 index ETF, is 2.0 percent.) In this zero-yield-after-inflation bond world we’ve been living in now for five years, 3-5 percent cash flow gets one’s attention.

Dividend payouts set a new record

Wisdom Tree publishes some fascinating and useful data on the global dividend stream. It’s at a record high of $1.092 trillion, up about 25 percent since 2009.

 

Global Nominal Dividend Stream (in $M)

5/31/2013

5/31/2012

5/31/2011

5/31/2010

5/31/2009

5/31/2008

United States

$339.93

$293.14

$253.85

$225.35

$255.13

$288.02

Int’l – Developed

$568.68

$539.79

$580.92

$458.14

$458.88

$660.11

Emerging Markets

$183.43

$169.68

$169.48

$109.25

$105.82

$135.57

WT Global Dividend Index Total

$1,092.04

$1,002.61

$1,004.25

$792.74

$819.83

$1,083.70

WisdomTree Research
MARKET INSIGHTS [ July 2013 ]

Global Percentage Dividend Stream

5/31/2013

5/31/2012

5/31/2011

5/31/2010

5/31/2009

5/31/2008

United States

31.1%

29.2%

25.3%

28.4%

31.1%

26.6%

Int’l – Developed

52.1%

53.8%

57.9%

57.8%

56.0%

60.9%

Emerging Markets

16.8%

16.9%

16.9%

13.8%

12.9%

12.5%

 

Why are payouts so high in Europe? Aren’t we barely growing worldwide, and isn’t Europe a mess?  I speculate it is coming from the big, global companies that are reluctant to invest in their own businesses, have bought back as much of their own stock as they can stand, and are sitting on big piles of cash yielding nothing.  Paying out that cash as a dividend seems like a reasonable thing to do.

 

Yield’s big impact

As we know, dividend yield can have a huge impact on long term return, even at modest payout levels.  See Dividends on dividends” for an explanation of how the Dow returned 53x in the last 40 years, even though the price return was 13x.  Where did the other 40x come from?  Dividends. And then dividends on dividends through reinvestment.  That’s the beauty and glory of compounding.

So should you own these non-US ETFs? For many investors the answer is yes, but not because of the current yield. Yields rise and fall over time, and yield does not always track with price appreciation (as we discussed in “Finally a free lunch, or maybe not”) However, today’s higher yields outside of the US do point to one of the big benefits of diversification – different assets behave differently in response to economic, political and market conditions.

With 2/3 of dividends originating outside the US (not to mention a large share of today’s most innovative companies, valuable natural resources and breakthrough intellectual property) we consider international index ETFs a staple in most client accounts. Of course, what’s right for you can only be answered after a thorough statement of investment goals, selection of the appropriate ETFs, implementation of portfolio cost control, emphasis on after-tax results and customization of goal based asset management.  That’s what we do every day at Osbon Capital.

 


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