What is DMDV? (Pros, Cons, and Strategies)

If you're aiming to build a resilient portfolio with a focus on high dividend yields from developed markets, DMDV might be an ETF worth considering. In this blog post, we'll delve into the AAM S&P Developed Markets High Dividend Value ETF (DMDV), exploring its key features, the pros and cons, and some effective strategies for incorporating it into your investment portfolio.

What is DMDV?

DMDV stands for AAM S&P Developed Markets High Dividend Value ETF. This ETF aims to provide high dividend income while investing in developed market companies outside of the United States.

DMDV tracks the S&P Developed Ex-U.S. Dividend & Free Cash Flow Yield Index. This index is designed to identify companies that offer high dividend yields and strong free cash flow. Companies in the index must meet specific criteria to ensure they are not just high dividend payers, but are financially robust as well.

Key Features of DMDV

• Focuses on developed market companies outside the U.S.
• Emphasizes high dividend yields and strong free cash flow
• Companies in the index generally exhibit financial stability and consistent dividend payments

The companies selected for DMDV must have a strong track record in terms of dividend payments and free cash flow sustainability, making them potentially less volatile and more reliable for income-focused investors.

DMDV Composition

DMDV primarily consists of well-established companies from developed markets like Europe, Japan, and Australia. Notable sectors include financials, consumer goods, and healthcare, which are traditionally stable dividend payers. Examples could include companies like Unilever, HSBC, and Roche Holding.

Pros of DMDV

High Dividend Yields

One of the standout features of DMDV is its focus on high dividend yields. For income-focused investors, this ETF can provide a steady and substantial income stream. It is particularly appealing to those looking for regular payouts.

Global Diversification

DMDV provides exposure to developed markets outside the United States, offering a layer of diversification that protects against country-specific economic downturns. This global approach mitigates risks associated with over-reliance on U.S.-based investments.

Strong Free Cash Flow

The emphasis on free cash flow ensures that the companies in the ETF are financially robust and capable of sustaining their dividend payments. This criterion helps in identifying companies that are less likely to cut dividends during economic downturns.

Cons of DMDV

Currency Risk

Investing in international markets brings currency risk into the equation. Fluctuations in foreign exchange rates can impact the returns on your investment. This is a consideration you’ll need to manage if you’re investing in DMDV.

Exposure to Global Economic Conditions

While global diversification is a pro, it also means that DMDV is exposed to economic conditions and policies in multiple countries. Political instability, economic downturns, or changes in trade policies in developed markets can impact the ETF's performance.

Lower Growth Potential

Compared to ETFs that focus on emerging markets or high-growth sectors, DMDV might offer lower capital appreciation potential. High dividend-paying companies are often mature, and while they provide stable income, they might not offer significant growth opportunities.

DMDV Investment Strategies

DMDV is a suitable choice for income-focused and risk-averse investors looking for a stable dividend yield from globally diversified, financially robust companies. Here are some strategic approaches to consider:

Long-term Income Strategy

Given its focus on high dividend yields and financial stability, DMDV is ideal for a long-term income strategy. By holding DMDV over an extended period, investors can benefit from consistent dividend payments, helping with income needs during retirement or other long-term financial goals.

Diversification Strategy

Incorporate DMDV as part of a diversified portfolio to spread risk across different geographical locations and economic sectors. This strategy helps in reducing the reliance on U.S. markets, providing a cushion against volatility from any single economy.

Reinvestment Strategy

Leveraging the power of compounding by reinvesting dividends can significantly boost your returns over time. This strategy involves using the dividends paid out by DMDV to purchase additional shares of the ETF, enhancing overall returns through the compound growth effect.

Hedging Against Local Market Risk

For U.S.-based investors, DMDV can serve as a hedge against local market risks. By allocating a portion of your portfolio to DMDV, you gain exposure to developed markets outside of the U.S., which might perform differently under varying economic cycles.

Tactical Asset Allocation

For investors who practice tactical asset allocation, DMDV can be used as a tool to cyclically balance your portfolio. During times when U.S. equities are overvalued, reallocating funds to stable, high-dividend-paying stocks in developed international markets through DMDV can be a prudent move.

Conclusion

DMDV presents a compelling option for investors seeking high dividend yields with the added benefit of global diversification. While it comes with certain risks associated with international investments, its emphasis on financially stable companies and strong free cash flow makes it a valuable component of a diversified portfolio. By understanding the pros and cons and implementing appropriate investment strategies, DMDV can serve as a robust vehicle for achieving long-term financial stability and income generation.