Royal Dividends: U.K. ETFs May Have Dividend Allure


This is not a case of home country bias or another crazy American spouting off about how great the U.S. is, but when it comes to dividends, no country is on par with the U.S. Recent data published by ETF sponsor WisdomTree show how dominant the U.S. on the dividend front.

As of May 31, the U.S. accounted for 31.1 percent of the WisdomTree Global Dividend Index with a dividend stream in dollar terms of almost $340 billion, the data show. Nearly 1,330 U.S. companies are currently featured in that index. The good news for investors looking for some international dividend exposure is that a familiar country represents a credible payout destination.

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The U.K. occupies the second spot in the WisdomTree Global Dividend Index with 278 companies accounting for 9.9 percent of the index. Those firms had a combined dividend stream of nearly $107.6 billion for the period ending May 31, according to WisdomTree.

Even if one adds up the dividend stream of the best emerging markets dividend destinations, those countries lag the U.K. "We believe that the UK is a real standout, occupying the second position behind only the United States. In fact, if you were to add the Dividend Streams of constituents from China, Russia, Brazil, Taiwan and Malaysia (the top five emerging market country contributors to the global Dividend Stream), they still would not exceed the United Kingdom's Dividend Stream," according to WisdomTree.

Despite the size of the U.K. economy, the world's sixth-largest last year, there is a scant number of U.K. ETFs listed in the U.S. for investors to consider. The $2.3 billion iShares MSCI United Kingdom ETF (NYSE:EWU) is the established fund while the WisdomTree United Kingdom Hedged Equity Fund (NYSE:DXPS) is the new kid on the block. The iShares MSCI United Kingdom Small-Cap ETF (NYSE:EWUS) is the avenue for accessing U.K. small-caps.

The list of the largest U.K. dividend payers includes familiar names such as HSBC (NYSE:HBC), BP (NYSE:BP), Royal Dutch Shell (NYSE: RDS-A) and British American Tobacco (NYSE:BTI). HSBC is EWU's largest individual holding at weight of 7.9 percent although two Shell securities combine for 8.3 percent of the ETF's weight. BP and British American Tobacco receive allocations of 5.2 percent and 3.87 percent, respectively.

Those stocks combine for about 25 percent of the newly minted WisdomTree United Kingdom Hedged Equity Fund's weight. DXPS is not even a month old, but it does feature the currency hedge mechanism that has made the WisdomTree Japan Hedged Equity Fund (NYSE:DXJ) so popular.

That is an important feature with DXPS on two levels. First, new Bank of England Governor Mark Carney is expected to engage in additional monetary easing, perhaps later this year. Second, some major British companies, including HSBC, BP and Shell set their dividends in dollars, not sterling.

Not Perfect Broadly speaking, as a dividend market, the U.K. is strong, but there are issues to consider. The trailing 12-month yield on EWU is just 2.94 percent. Additionally, dividend growth is expected to slow in the U.K. Second-quarter payouts there reached a record $38.6 billion, Reuters reported, citing Capita Registrars. Capita pared its full-year dividend growth target for the U.K. to 7.7 percent from 8.6 percent.

"Dividends are not falling, they are merely growing more slowly, but slow enough for us to further trim our underlying forecast for the year," said the firm, according to Reuters.

In the second quarter, media, financial services and food producers were among the best British dividend raisers. Call media and food producers consumer discretionary and consumer staples and there is over 24 percent of EWU's weight. Those two sectors combine for about 24.6 percent of DXPS. Financial services names are almost 22 percent of EWU and 17.7 of DXPS.

British chemicals firms, sitting on impressive cash hoards, are expected to be new drivers of dividend growth, but utilities are expected to lag, the Wall Street Journal reported, citing Markit. Materials and utilities combine for about 13 percent of EWU and 16.2 percent of DXPS.

What is important to note with materials dividend growth in these ETFs is that BHP Billiton (NYSE:BHP), the world's largest mining company factors prominently into the equation. The company may be viewed as Australian, but its London listing makes it a top-10 holding in DXPS and the eleventh-largest holding in EWU. In dollar terms, BHP's dividend has nearly tripled since 2007.

Another possible source of future U.K, dividend growth that could benefit both of the ETF's mentioned here is BP. Europe's second-largest oil company by market value is one of the non-U.S. oil companies U.S. investors are most familiar and, arguably, for some negative reasons. Those negative reasons include the worst oil spill in U.S. history.

When it comes to dividends, one way of looking at BP is to compare the company to a major U.S. bank. The firm played a part in an extraordinary event and was forced to slash its dividend. And as some major banks are doing in the post-financial crisis world, BP is now restoring its dividend. The payout was 84 cents a share per quarter before the spill and was then slashed in half. BP's dividend is now back to 54 cents per quarter, implying there could be significant growth ahead as the company tries to get back to pre-spill payout levels.

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