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Vanguard's International Dividend Funds a Welcome Addition

Ben Johnson, CFA

Ben Johnson: In March of 2016, Vanguard launched a pair of new international dividend funds: the Vanguard International High Dividend Yield Index fund, and Vanguard International Dividend Appreciation. If the names seem familiar, they should. These funds are close cousins of Vanguard High Dividend Yield, which carries a Morningstar Analyst Rating of Silver, and Gold-rated Vanguard Dividend Appreciation.

The duo is a welcome addition to the roster of 30-plus international dividend-oriented ETFs. The funds are the lowest priced options on that menu. VYMI levies an annual fee of 0.30%, while VIGI charges 0.25%.

Both these funds' underlying indexes share similar methodologies to those underpinning their U.S. cousins. VYMI, for example, is tied to the FTSE All-World Ex-US High Dividend Yield Index. The index uses the FTSE All-World Index as its starting point. From there, it drops U.S.-listed stocks, REITs, and stocks that aren't expected to pay dividends over the next 12 months. The stocks that remain are ranked by dividend yield and added to the index until its cumulative market capitalization equals half that of the parent index. What results is a narrower portfolio of higher-yielding stocks.

VIGI tracks the Nasdaq International Dividend Achievers Select Index. The benchmark's parent index is the Nasdaq Global Ex-US Index. Starting from there, the benchmark leaves out REITs, screens stocks for liquidity, and homes in on stocks that have increased annual dividends for at least seven years running. As is the case with the index underlying VIG, additional "proprietary" eligibility criteria. I'm not a fan of this caginess with respect to the minutiae of the methodology, but it's hardly a deal breaker. What ultimately comes out in the wash is a concentrated portfolio of high-quality dividend-paying stocks.

VYMI and VIGI are terrific options for investors looking for low-cost, diversified exposure to international dividend-paying stocks.