It has been just under a year since the Vanguard International High Dividend Yield ETF (VYMI) first featured here. Remember this is basically a sister to domestic-focused VYM – the Vanguard High Dividend Yield ETF – which I’m sure many readers will know quite well. Despite its name suggesting otherwise, the selection process here is slightly more refined than just collecting the highest yielding stocks out there. Stocks are indeed ranked by forecast 12-month dividend yield, but they are chosen so that half the universe based on market value is captured. The weightings of each individual ticker are then also based on market-cap.
What that does is skew the ETF toward larger dividend-paying blue chip stocks. Think names like TD Bank, Nestlé, Novartis, Roche, HSBC, Unilever and Royal Dutch Shell, which currently make up the top holdings here. The focus on dividend yield also makes it a crude way to capture value, though I accept there are better ways to do that. A vehicle like EFV – or the iShares MSCI EAFE Value ETF to give it its full name – is one that springs to mind, and will to a large degree swim in the same pool as VYMI anyway with respect to its constituents. Still, if you have a proclivity for dividend paying stocks, then VYMI is a solid enough asset in my view. There are certainly much poorer constructed dividend ETFs out there.
A couple of other points to consider that may have been missed last time. Firstly, there are like 1,200 stocks in this thing all together, with the top ten as a whole making up less than 15% of assets. Suffice to say that VYMI is pretty well diversified. Secondly, just over 20% of assets are currently invested in various emerging market stocks. There’s no need for geographic diversification just for the sake of it, but current valuations there strike me as quite attractive.
Units Recover COVID Losses
VYMI had obviously taken a pretty big knock due to COVID when it first appeared on the site last May. The units traded for around $48 back then, roughly 25% lower than where they began that year. That was a larger fall than VYM experienced albeit marginally better than the MSCI ACWI ex USA Value Index. Underperformance versus VYM was probably not surprising given VYMI’s exposure to bank stocks. Dividends also took a big hit – with VYMI paying out $1.96 per unit in 2020 versus $2.68 the year before. Again, that’s not particularly surprising – dividend cuts, like those dished out by oil giants Shell and BP, speak for themselves, while a stronger US dollar probably played its part too. Obviously foreign currency changes are something investors need to bear in mind here, especially over shorter timeframes.
The good news is that VYMI has recovered its COVID losses in full. My screen shows a current price of $66.63 per unit, equal to a circa 9% return since January 2020. The bad news is that it continues to underperform VYM. Note that VYMI has actually bested VYM on the 12 and 6-month view, but that appears to be a reflection of the severity of VYMI’s initial drop back in Q1 2020. Heading back to our pre-COVID baseline at the start of 2020, VYM’s outperformance clocks in at around 500 bps. VYM has also outperformed VYMI year-to-date as well.
Now, readers will know I am not one to measure success on that kind of timeframe, but this reflects a trend that has been going on for some time. Indeed, US stocks have outperformed their foreign counterparts for over a decade now. VYMI hasn’t been around quite that long, but its 9.3% per annum pre-tax total return since inception (2016) still puts it way behind VYM. Not only that, but value as a strategy has also performed poorly for quite a while now. VYMI has massively underperformed the broader MSCI ACWI ex USA Index which contains growth names like LVMH and Alibaba.
Still Reasonable Value
Given the above, it’s not surprising that a lot of investors don’t feel the need to look at this one. I mean, it’s not like VYM’s constituents don’t also do business abroad. If you want international exposure, just look at US blue chips like Procter & Gamble and Johnson & Johnson, prominent holdings of VYM. Furthermore, those arguing in favor of looking abroad because of cheap valuations are still waiting for that to play out. I made that very argument just under a year ago and I still think it holds water. Finally, VYM sports a higher quality portfolio of stocks based on profitability – more on that in a second.
In terms of valuation, Vanguard has the PE ratio here at a shade under 15. That is based on the past year, which obviously includes some very distressed earnings numbers due to COVID. The forward PE ratio clocks in at around 12 or so. That seems to stack up well against VYM, which trades on a forward PE ratio of around 16. There’s a ‘but’ coming here, and that is what was just mentioned about VYM’s higher earnings quality. VYMI is more exposed to bank stocks, with consumer staples and technology making up a smaller slice of the pie versus VYM. It’s worth noting the difference in terms of return on equity is around 400-500 bps in favor of the latter. Note also that VYMI surrenders 22 basis points net to VYM in terms of the annual fee as well. The ongoing charge here currently stands at 0.28% per annum.
Despite the above, VYMI still looks like it has a decent future ahead of it. I mean, it’s not exactly asking much to generate decent returns off a PE of 12 is it? The implied internal rate of return, with no growth, is already around 8% per annum. Now, the TTM distribution yield currently stands at circa 3%, though that is perhaps not a particular useful metric. I think the ‘true’ forward dividend yield of the ETF’s current holdings will be higher than that. Anyway, annual EPS growth in the 5% area would then probably see us just about okay. It’s not a high bar, and on that basis I continue to think VYMI will do okay for long-term investors.
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