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Guess what's going to happen again in 2021? Domestic stocks will beat international counterparts. With a just three weeks left in 2021, the S&P 500 is up 26% while the MSCI EAFE Index is higher by just 9.6%.
Advisors and clients have seen this movie before. In the six-year stretch spanning 2015 through 2015, the MSCI EAFE Index beat the S&P 500 just once on an annual basis – in 2017. Diversification benefits aside, statistics like those confirm international equities, even safer developed markets fare, can be a tough sell for clients.
Hey, even advisors are likely tired of hearing about international stocks being inexpensive. They've been hearing that for years and while it's true, all it's resulted is under-performance against domestic stocks. In other words, clients need a compelling reason to be enthusiastic about ex-US stocks and it's on advisors to give it to them.
Fortunately, advisors don't have to stretch to do so. Low interest are still an issue here in the U.S. and while so even if the Federal Reserve hikes interest rates multiple times next year. Conversely, dividends are growing and markets outside the U.S. are participating in that trend.
International Equity Income Matters
Historically, international developed markets benchmarks, such as the MSCI EAFE Index, sport higher dividend yields than the S&P 500. That's by virtue of many international indexes being heavy on cyclical value stocks and light on growth fare, such as technology.
Going beyond the value tilt, it shouldn't be ignore that ex-US developed markets represent a significant percentage of global dividends and those payouts are growing again, heading back toward levels last seen before the coronavirus pandemic.
“Developed markets in Europe and Asia contributed just over 40% of global dividends in 2020, as represented by the MSCI World Index, and represent a large opportunity,” says ProShares Senior Investment Strategist Kierwan Kirwan. “International developed stocks have traditionally yielded more than domestic stocks for years. This dynamic still holds true today, albeit with lower absolute yield level.”
Due to the fact that some developed markets outside the U.S. – Australia and the U.K. stand as prime examples – cut dividends at a deeper clip than was seen in the States last year, there's potential for more rapid dividend growth as payouts are restored. That's already playing out as banking and mining commodities producers lead dividend resurgences in Australia and the U.K.
“The silver lining to this dynamic is that international stocks are poised for a strong rebound and are likely to deliver faster levels of dividend growth than domestic payers,” adds Kirwan. “European markets are providing early evidence of this trend and saw first half 2021 payments jump significantly from the prior year.”
That Pesky Valuation Argument
Yes, it's difficult to talk about developed market international equities without citing valuation. However, it's relevant in relation to dividends. As advisors well know, dividend stocks usually aren't inexpensive and that's even more true with quality dividend growth fare. Plus, there are some potential benefits to buying cheap stocks.
“The upside to recent underperformance is that international stocks are cheap at a time when domestic stocks are not. Stated simply, the cheaper the starting valuation, the more attractive future returns tend to be,” notes Kirwan.
Yes, all that under-performance shouldn't be ignored, but past performance isn't a guarantee of future returns. With the stocks inexpensive and clients needing income, a conversation about international dividend payers is warranted with 2022 beckoning.
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