Winning Both Ways with Global Dividends

08/26/2010 11:40 am EST

Focus: FUNDS

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of Making Money Alert, says global dividend-paying stocks provide capital appreciation in bull markets and a cushion in bad times.

With the world’s stock markets showing weakness recently, one strategy for investors to cushion the fall and still allow for the potential of capital appreciation is to invest in dividend-paying stocks.

The yields on such stocks have been on the rise lately, and the advent of exchange traded funds (ETFs) now lets you make one investment to gain the benefit of diversification through an array of international holdings.

WisdomTree Global Equity Income Fund (NYSEArca: DEW)—previously named WisdomTree Europe Equity Income Fund—seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the WisdomTree Global Equity Income index.

Despite the new name, the fund’s focus of letting investors buy dividend-paying stocks that are mostly outside of the United States remains intact. As a dividend-paying fund, DEW actually offers a nice yield.

The fund currently lists a standardized yield of [5.2% at Wednesday’s close above $37—Editor]. With banks and government bonds paying far lower interest rates, DEW is attractive for its capital appreciation opportunity and its enticing yield.

Indeed, average dividend yields for European stocks are higher than the rates paid on government bonds for only the third time in the last 30 years, The Wall Street Journal reported in an August 7th article, “Europe’s Eye-Catching Dividends.”

DEW [had been] rebounding, [but pulled] back recently. The obvious question is whether the recent up swing will continue. If it does, DEW will be a nice investment that will provide capital appreciation from increases in its share price [and] income from the dividend payments. You win both ways.

If the fund’s share price [continues to pull] back with the rest of the market, you will be cushioned somewhat because dividend-paying investments typically hold their value better than non-dividend-paying stocks. Even if the market takes time to recover, you still receive dividend payments while you wait.

Of course, public companies that pay dividends sometimes cut or reduce them. With an ETF, you are protected from 100% of your portfolio eliminating dividend payments at the same time. Companies typically try to avoid reducing their dividends, and certain companies that generate strong cash flow are unlikely to need to take such actions, even in an economic slowdown.

The largest percentage of its holdings in any one company is 2.17% in AT&T (NYSE: T), as of August 16th. The other top four holdings of the fund on that date were: Total (NYSE: TOT), 2.06%; Vodafone Group (NYSE: VOD), 1.85%; Telefonica (NYSE: TEF), 1.77%, and France Telecom (NYSE: FTE), 1.65%.

DEW’s biggest sector concentration, also on August 16th, was financials, 23.1%, followed by telecommunications services, 18.7%; utilities, 13.06%; health care, 10.49%, and consumer staples, 8.67%.

Among its country holdings on that date, the United States accounted for 20.41%; France, 13.26%; the United Kingdom, 12.8%; Australia, 8.94%, and Spain, 6.61%.

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