Why Investors Should Consider a Global Dividend Strategy

We are only a few months into 2018 and already there are indicators that the benign financial environment investors enjoyed over the last few years is changing. For example the Bank of Canada has increased rates three times since last summer, the Dow Jones index lost 4.6 percent in a single day and the increasing risk of trade wars are making markets more difficult to navigate. In this new environment, many investors are looking at dividend investment strategies for their performance potential and attractive yields.

Selecting quality companies with strong fundamentals

The upward trend in interest rates could signal an improving economy, but these rate hikes will also affect dividend-paying companies. Highly leveraged companies can be sensitive to interest rate changes, as they tend to be more impacted by higher borrowing costs. Companies growing their dividends, on the other hand, are typically higher-quality companies with relatively strong cash flows and lower debt ratios. With less debt to service, these companies are well positioned to ride out periods of rising interest rates.

Companies paying sustainable dividend payments also tend to have strong fundamentals, such as low debt levels and a history of profitability, making them ideal long-term investments. In addition, their history of sustainable dividends indicates an ability to continue to grow and pay higher dividends in the future, a reliable way of positioning an investor’s portfolio for strong returns.

The benefits of global diversification

A portfolio that holds companies from around the world offers a buffer against country or region-specific downturns. In other words, a portfolio with broad global exposure enhances diversification, which can reduce volatility—an important factor for many investors’ portfolios. Global investing also expands the types of companies a portfolio can choose from, adding broader sector and currency options, which often results in lower correlations across individual holdings. 

However, despite the benefits of this asset class, it has been difficult for Canadian ETF investors to access a diversified portfolio with the benefits of both high dividend yields and the characteristics of a dividend growth company, until now.  

Introducing the Franklin LibertyQT Global Dividend Index ETF

Franklin LibertyQT Global Divided Index ETF (TSX Ticker: FLGD) is a Smart Beta ETF that fills an important gap in the Canadian ETF landscape. Like all of our Smart Beta offerings, it is designed to deliver better risk-adjusted investment outcomes than traditional market cap- weighted products.

With its global menu of constituents, unique investment approach and competitive management fee of 0.45%, FLGD can easily complement an investment portfolio, without detracting from returns through excessive costs. To see how FLGD embodies a truly global perspective, take a look at the regions in which the fund invests: 

Some highlights of what FLGD offers:

• A core portfolio building block through exposure to global dividend equities (the ETF’s investment universe is the MSCI ACWI Ex-REITS Index).
• A Smart Beta, low-cost solution with a management fee of 0.45%.
• A robust, two-step dividend screen that first narrows the investment universe to a shortlist of high-quality global companies paying above-average yields, and then applies a Smart Beta Quality filter to this shortlist for a final selection of approximately 100 global dividend companies.  

For Canadians who are concerned about the effects that market volatility and rising rates could have on their investments, an ETF that focuses on finding global companies offering dividend growth could be a very compelling option. In my next article I will do a deeper dive on how the Franklin LibertyQT Global Dividend Index ETF screens for companies with attractive dividends, and then further narrows this list of franchises through a Smart Beta quality factor overlay.