Vanguard Expands into International Dividend Stocks

Vanguard, a money manager with over $7 trillion in assets, has made a noteworthy move into international dividend-paying stocks. The company recently unveiled the International Dividend Growth Fund, which aims to hold shares of international companies that are expected to consistently increase their dividends.

According to Dan Reyes, the global head of Vanguard's Portfolio Review Department, the company is committed to creating products that cater to the long-term needs of investors and offer them the best chance for investment success. He emphasizes the importance of partnering with world-class investment talent and highlights Vanguard's disciplined and research-based process in developing their product lineup.

The newly launched fund will be managed by a team from Wellington Management Company, which is also responsible for managing the successful Vanguard Dividend Growth Fund (VDIGX).

While the reasons behind Vanguard's decision to offer the fund at this time remain unclear, it is worth noting that dividends have been somewhat out of favor recently. The Vanguard Dividend Growth Fund has seen a modest 1% increase year to date, while the S&P 500 has experienced a significant 14% growth (excluding dividends).

Similarly, international stocks have also struggled to deliver satisfactory returns, with the Vanguard Total International Stock ETF (VXUS) witnessing only a 4% increase so far this year.

In contrast, investors have shown greater interest in U.S. growth stocks like Nvidia (NVDA). The Nasdaq Composite has surged around 27% year to date, largely driven by the impressive performance of Nvidia, whose shares have soared almost 200%.

Considering these market dynamics, the Vanguard International Dividend Growth Fund presents an opportunity for investors to diversify their portfolios and capitalize on potential returns that may arise when others are focused elsewhere.

Valuations and Appeal

Valuations play a significant role in the appeal of stocks within the International Stock ETF. Currently, these stocks trade for less than 13 times the earnings analysts expect for the coming 12 months. While this represents a small discount compared to the five-year average, it is substantially lower than the 26 times multiple for the Nasdaq Composite. Notably, the discount of international stocks to the Nasdaq is larger than historical norms.

The Strength of the U.S. Dollar

The U.S. dollar's strength is another favorable factor contributing to the appeal of international stocks. Over the past few years, the U.S. Dollar Index (DXY), which measures the dollar against a basket of other currencies, has risen from around 91 to approximately 103. This increase coincides with the Federal Reserve's decision to raise interest rates starting in March 2022.

It's important to note that differing interest rates between countries can impact currency values. As rates rise in one country compared to another, investors may need to hold the local currency to invest in assets with higher returns. With the Fed rate-hike cycle nearing completion, there is potential for foreign currencies to strengthen. Consequently, dividends paid in foreign currencies may become more valuable for investors.

Vanguard's Approach

Vanguard, known for its investment products, takes a unique approach when developing new funds. The company doesn't consider market valuations or timing when launching products. Instead, Vanguard focuses on providing funds that deliver long-term investment merit across various market cycles. By relying on low-cost active strategies with enduring and repeatable investment processes, Vanguard aims to add value and offer investors opportunities to outperform the markets.

This approach aligns with sound advice to avoid market timing. Additionally, diversification is always recommended. Diversifying investments across different countries, asset classes, and growth versus dividend-paying stocks can help manage risk and enhance returns. While growth stocks may be performing well currently, it's crucial to remember that dividends account for approximately 40% of total stock returns over the long term.

In conclusion, the appeal of international stocks is strengthened by attractive valuations and the strength of the U.S. dollar. Vanguard's approach prioritizes enduring investment merit over market timing. Investors are advised to diversify and consider the significance of dividend-paying stocks in their portfolios.