DIVO - Can IDVO Repeat The Success Of DIVO?

2023-07-27 23:28:42 ET

Summary

• Amplify International Enhanced Dividend Income ETF is a new actively-managed fund that replicates the successful strategy of its sister fund, DIVO.
• IDVO aims to have a dividend yield of 4-5% by investing in undervalued international stocks and writing covered calls.
• While there are risks such as currency risk associated with foreign stocks, the fund's early results are promising so far.

Amplify International Enhanced Dividend Income ETF ( IDVO ) is a relatively new and less-known actively-managed fund that has recently been launched. It's basically the sister fund of highly popular DIVO ( DIVO ) by the same company. While DIVO focuses on American stocks (in fact majority of DIVO's holdings are in Dow Jones Index), IDVO focuses on international stocks with the same idea and same concept.

For those that don't know, DIVO has been widely successful so far, resulting in total returns of almost 110% in 5 years. The fund's strategy of picking undervalued stocks with strong dividend growth history and coupling it with writing covered calls on only about 20-25% of its total position seems to have worked nicely for investors. This is probably why the company launched an international version of this fund and IDVO seems to replicate DIVO's strategy on an international level.

The fund currently has a dividend yield of 4.5%. In the long run the fund shoots to have a yield from 4% to 5% where 2-3% of the yield comes from the dividends it receives from its holdings and another 2-3% from writing covered calls. Since the fund's yield goal from covered calls is rather modest, it isn't writing calls very aggressively which can allow for investors to participate in share price appreciation as well as dividend growth. At least that's how it worked for DIVO and in theory should work similarly for IDVO as well.

When we look at IDVO's country allocation, we see a fairly balanced chart with many different countries from different continents and not one country dominating. The biggest share of the pie belongs to the UK and its share is at 16%. Keep in mind that the fund only sold about 50-60 stocks at any given time which means it will have about 1-3 companies from each country for the most part. Also keep in mind that the fund can only write covered calls efficiently in countries where there is sufficient liquidity and volume in options markets and not all countries offer this. Luckily, it only needs to write covered calls on 20-25% of its total position.

The fund seems to be overweight in Energy, Materials and Financial sectors which account for almost half of its total weight. The biggest holding of the fund is Petrobras ( PBR ) accounting for 3.5% of its total weight. Many investors are familiar with Petrobras and its generous dividend policy where the stock's yield usually comes in double digits but many of the fund's holdings yield much less than that.

The fund's major holdings include Coca-Cola FEMSA ( KOF ) which operates in Mexico and Latin America, Japanese manufacturing giant Mitsubishi ( MSBHF ), Argentinian bank Banco Bilbao ( BBVA ), Tencent Holdings ( TCEHY ) and TotalEnergies ( TTE ). Notice that yields of these holdings range from 0.70% to 5.76% but the average will usually be around 3-4% which is the fund's goal.

One of fund's challenges moving forward will be finding international stocks with consistent dividend growth. In America many stocks find pride in raising dividends year after year and we have terms like "dividend champion", "dividend king" or "dividend aristocrats" but these concepts are rather new in many other countries. In America the expectation is that a company that established itself as a dividend grower should hike their dividends every single year no matter what, even if the company's profits declined or completely disappeared during that year. For example, many American companies hiked their dividends in 2020 even with their profits falling significantly. One such example is McDonald's ( MCD ) which continues to hike dividends every year regardless of where their profits may be.

Outside of the US (particularly Europe and Asia) things usually work differently because companies are only expected to pay dividends out of their profits so if their profits drop, so do the dividends and no one is surprised. Even some of the most established companies can have erratic dividend histories in some countries but then there are companies like Nestlé S.A. ( NSRGY ) which follow the American tradition of raising dividends every year even if profits might not have grown. This is all about managing expectations. There are plenty of foreign stocks that raise their dividends every year but don't be surprised if your favorite foreign stock cuts dividends one year because their profits declined.

When it comes to international funds, one risk to be aware of is currency risk. Since this fund is not particularly concentrated in any one country or region, the risk is lower but the basic idea is that if you invest in a foreign stock where the country's currency loses value against the US dollar rapidly, your gains will be eaten away by this currency erosion. One such example is Turkey ( TUR ). Even though Turkish stock market has performed nicely over the years in local currency, American investors who bought Turkish stocks mostly lost money because of how fast Turkish currency lost value against the US dollar. This fund runs less of this risk since it's highly diversified but there is always the risk that the US dollar can have a rally against a basket of other currencies all at once, erasing some of your gains in foreign stocks. Also keep in mind that a lot of foreign stocks might be dividend growers in their own currency but this doesn't make them dividend growers in the US dollar.

IDVO has been around for less than a year but it's total return is already up almost 20%. I must also add that part of this could be due to the fund's "lucky" timing since it was established very close to the bottom of last year's bear market which allowed it to participate in very little of the downside of last year but pretty much all of the upside since October.

I would say that if you own DIVO and love it, you can complement your DIVO position with this fund. Between DIVO and IDVO, you'd have your bases covered in terms of US and foreign stocks. If this fund performs anywhere close to DIVO's performance in the long run, you won't regret it. In the future I will be looking at this fund's dividend growth rate and its overall returns to get a better idea about its quality but so far the results look encouraging.

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