DIVI - DIVI Is A Buy As Foreign Dividend Stocks Have Experienced A Stealthy Rally

2023-05-19 16:30:49 ET

Summary

• As megacap US growth captures the limelight, major international indexes are at or near cycle highs.
• With a nearly 6% dividend yield in the past year, DIVI features a low valuation and modest expenses.
• Its chart is also impressive as shares are over near 52-week highs.

The dollar has attracted some buyers lately. While the greenback dipped following comments from Fed Chief Powell on Friday morning, the "DXY" remains firmer from a month ago. Over that span, US growth stocks have been stealing the show from foreign equities. Still, both the German DAX and Japan TOPIX have climbed to new highs. Those markets tend to feature stocks that pay dividends at rates above most domestic firms.

I have a buy rating on the Franklin International Core Dividend Tilt Index ETF ( DIVI ). It sports an exceptionally low annual expense ratio, inexpensive valuation, and impressive price action. That's the kind of triple play I look for in a tactical overweight. The kicker is that DIVI spits off an impressive yield, too.

Dollar Turning Up, Ex-US Equities Dipping vs US Stocks

According to the issuer , DIVI seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Morningstar Developed Markets ex-North America Dividend Enhanced Select Index. The index aims to deliver a higher dividend yield while minimizing expected tracking error relative to the broad-based parent index.

Digging into the ETF, DIVI sports a low expense ratio of 0.09%, but the median 30-day bid/ask spread is 14 basis points, so liquidity can be an issue at certain times. Thus, using limit orders rather than market orders during periods of low liquidity is prudent when trading DIVI. But with a 5.6% trailing 12-month yield, this is a high-payout fund for income investors. Also bear in mind that international equity ETFs can offer tax benefits for US investors via the Foreign Tax Credit. Volume though is not all that high with a 20-day average of just 147,000 shares as of May 18, 2023.

DIVI is very much a large-cap focused portfolio, with nearly 90% of total assets in that market-cap space, according to the Morningstar Style Box . There is a mix of value, blend, and growth while the broad valuation gauge shows a modest 12.2 price-to-earnings ratio and a cheap 1.5x price-to-book multiple. Particularly appealing on valuation is the low 6.1 price-to-cash flow ratio, with impressive long-term earnings growth.

DIVI: Portfolio & Factor Analysis

Keeping the valuation in check is DIVI's relatively high allocation to the cyclical-value Financial sector. Non-US financials have largely outperformed the US Financial sector this year due to the country-specific regional banking turmoil. Even with the forced takeover of Credit Suisse by UBS back in March, foreign banks have performed well in 2023. But if the Information Technology sector continues to rally big, expect DIVI to produce negative alpha due to its light growth positioning.

DIVI Sector Allocation

The Technical Take

Despite some liquidity issues, DIVI rocks a strong chart. Notice in the graph below that shares are above their 2021 peak, with volume spiking this year. A caution signal is found with the RSI momentum index at the top of the chart - there is a bearish divergence as DIVI inches to new highs. I would like to see more vigor with this breakout, otherwise, the fund is at risk for a bearish false breakout reversal.

Still, its long-term 200-day moving average has turned positively sloped, and the March pullback came right down to that trend indicator before another buying wave appeared. Overall, swing traders can be long here with a mental stop under the Q1 nadir (a hard stop may not be ideal due to the wide bid/ask spread that can occur).

DIVI: ETF Rests Near Multi-Year Highs

The Bottom Line

Long-term investors should feel confident about owning DIVI. The index fund has very low expenses with broad diversification across non-US markets and sectors while recent technical price action and momentum are solid.

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