When considering dividend income, many investors instinctively opt for the Vanguard High Dividend Yield ETF (VYM) due to its established presence in the U.S. market. However, a less-recognized international alternative, the iShares International Select Dividend ETF (IDV), has quietly outperformed its domestic peer. Over the past year, IDV recorded an impressive 26.86% gain, significantly surpassing VYM's 15.53% increase, with both figures inclusive of distributions. This stark difference in performance warrants a closer look for those seeking to optimize their income allocations.
While VYM, with its substantial $94.6 billion in net assets and holdings in prominent U.S. companies like Broadcom, JPMorgan, and Exxon Mobil, remains a robust core holding, its recent performance has been overshadowed. The long-term trend previously favored VYM, which saw its price appreciate by 196.98% over ten years, against IDV's 162.27%. However, the short to medium-term landscape has shifted, with IDV leading VYM over the past five years (92.63% vs. 73.66%) and year-to-date (14.31% vs. 11.82%). This shift is largely attributed to differing dividend cultures; international companies, particularly in developed markets like Europe and Asia-Pacific, tend to distribute a fixed share of annual profits as cash dividends, a practice influenced by shareholder expectations and historical regulations, contrasting with the U.S. focus on buybacks.
Investors considering IDV should be aware of its unique characteristics, including less consistent quarterly payments and potential withholding taxes from foreign governments. For example, IDV's distributions can fluctuate significantly, with a recent September payment of $0.5298 following a much larger June payment of $1.101643. In contrast, VYM's quarterly payments remain more stable, hovering between $0.8417 and $0.9795. While foreign tax credits may mitigate some tax implications in taxable accounts, this amount is often forfeited in IRAs. Furthermore, IDV carries a higher annual expense ratio of 0.50% and introduces currency risk. For retirees reliant on predictable income, VYM might still be the preferred option. However, for those seeking broader market exposure and a higher overall annual income stream, IDV presents a compelling case, provided they are prepared to navigate its payment variability and tax considerations. A thoughtful allocation strategy, rather than a complete overhaul, could allow investors to benefit from the diversification IDV offers.
Diversifying investments globally can lead to enhanced returns and resilience, as demonstrated by the recent outperformance of international dividend funds. By exploring opportunities beyond familiar domestic options, investors can tap into different market dynamics and dividend strategies, ultimately strengthening their portfolios and fostering greater financial growth.
