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Tweedy Brown published a paper about the importance of dividends in stock selection and total return.

They cited "The Importance of Dividend Yields in Country Selection" by Michael Keppler, Journal of Portfolio Management (Winter 1991).

That study of the 20 years from 1969-1989 showed that among 18 MSCI country indexes, selecting and equal weighting the top 1 or 2 quartiles according to yield, and then holding them for three months (then reconstituting the portfolio every three months on that basis - 80 events of portfolio construction over 20 years) created the best returns. The study also showed that doing the same, but with the bottom 1 or 2 quartiles by yield produced the worst results.

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Here is a yield ranking of those country fund ETFs with more than $10 million in assets. Data is from Morningstar Principia as of July 31, 2012.

RankFund NameTicker12 Mo Yield
1iShares MSCI Spain IndexEWP12.10
2iShares MSCI New Zealand Invstb Mkt IdxENZL6.67
3iShares MSCI Belgium Investable Mkt IdxEWK5.89
4iShares MSCI Poland Investable Mkt IndexEPOL5.53
5iShares MSCI Australia IndexEWA4.74
6Guggenheim Frontier MarketsFRN4.27
7Market Vectors Gulf States Index ETFMES4.02
8iShares MSCI Italy IndexEWI3.93
9iShares MSCI Taiwan IndexEWT3.86
10iShares MSCI United Kingdom IndexEWU3.78
11iShares MSCI Malaysia IndexEWM3.72
12iShares MSCI Singapore IndexEWS3.60
13iShares MSCI France IndexEWQ3.53
14iShares MSCI Austria Investable Mkt IdxEWO3.48
15iShares MSCI Sweden IndexEWD3.35
16iShares MSCI Hong Kong IndexEWH3.24
17iShares MSCI South Africa IndexEZA3.22
18iShares MSCI Netherlands Invstbl Mkt IdxEWN3.01
19iShares MSCI Israel Cap Invest Mkt IndexEIS2.97
20iShares MSCI Germany IndexEWG2.87
21iShares MSCI Brazil IndexEWZ2.82
22iShares MSCI Switzerland IndexEWL2.79
23iShares MSCI All Peru Capped IndexEPU2.78
24iShares MSCI Thailand Invest Mkt IndexTHD2.67
25Global X Norway ETFNORW2.63
26Market Vectors Egypt Index ETFEGPT2.33
27Market Vectors Russia ETFRSX2.21
28iShares MSCI Canada IndexEWC2.16
29iShares MSCI Turkey Invest Mkt IndexTUR2.14
30iShares MSCI Japan IndexEWJ2.13
31SPDR S&P 500SPY1.95
32Market Vectors Indonesia Index ETFIDX1.59
33iShares MSCI Chile Investable Mkt IdxECH1.58
34iShares MSCI Mexico Investable Mkt IdxEWW1.47
35iShares MSCI Philippines Invstb Mkt IdxEPHE1.06
36Market Vectors Vietnam ETFVNM0.91
37iShares MSCI South Korea IndexEWY0.66
38PowerShares IndiaPIN0.31
39Market Vectors China ETFPEK0.00

Other studies suggest a similar approach with Price-to-Book works too. Here are the same funds ranked by P/B.

RANKNAMESYMBOLP/B
1iShares MSCI Italy IndexEWI0.57
2iShares MSCI Austria Investable Mkt IdxEWO0.74
3iShares MSCI Spain IndexEWP0.76
4Market Vectors Egypt Index ETFEGPT0.93
5iShares MSCI Japan IndexEWJ0.95
6Market Vectors Russia ETFRSX0.97
7iShares MSCI France IndexEWQ0.99
8iShares MSCI Poland Investable Mkt IndexEPOL1.08
9iShares MSCI Hong Kong IndexEWH1.10
10iShares MSCI Belgium Investable Mkt IdxEWK1.12
11Market Vectors China ETFPEK1.13
12iShares MSCI Netherlands Invstbl Mkt IdxEWN1.15
13iShares MSCI Thailand Invest Mkt IndexTHD1.15
14iShares MSCI Germany IndexEWG1.20
15Market Vectors Vietnam ETFVNM1.20
16iShares MSCI South Korea IndexEWY1.25
17Market Vectors Gulf States Index ETFMES1.29
18iShares MSCI Israel Cap Invest Mkt IndexEIS1.32
19iShares MSCI New Zealand Invstb Mkt IdxENZL1.37
20iShares MSCI Singapore IndexEWS1.42
21iShares MSCI Turkey Invest Mkt IndexTUR1.43
22iShares MSCI Brazil IndexEWZ1.44
23Global X Norway ETFNORW1.46
24iShares MSCI United Kingdom IndexEWU1.48
25iShares MSCI Taiwan IndexEWT1.57
26iShares MSCI Australia IndexEWA1.61
27iShares MSCI Sweden IndexEWD1.64
28iShares MSCI Canada IndexEWC1.74
29Guggenheim Frontier MarketsFRN1.76
30iShares MSCI Switzerland IndexEWL1.88
31iShares MSCI Chile Investable Mkt IdxECH2.01
32SPDR S&P 500SPY2.13
33iShares MSCI South Africa IndexEZA2.13
34iShares MSCI Malaysia IndexEWM2.22
35PowerShares IndiaPIN2.22
36iShares MSCI All Peru Capped IndexEPU2.30
37iShares MSCI Mexico Investable Mkt IdxEWW2.39
38Market Vectors Indonesia Index ETFIDX2.41
39iShares MSCI Philippines Invstb Mkt IdxEPHE2.59

Those who believe in mean reversion, and that the world is not going to fall apart, would own the "cheapest" quartile, and some market neutral types might even short the most "expensive" quartile against the cheap quartile.

We might want to apply a couple of other HI/LO ranking parameters to potentially improve the ranking.

We put together the following unproven ranking system. It relies on three ranking methods that have certain adherents, but we went a step further by combining them.

We ranked the country funds by P/B and by yield and by ratio of price-to-cash flow divided by the sum of the Projected Cash Flow Growth and the Yield.

That latter metric is an adaptation of Peter Lynch's modified PEG. To try to put slower growing dividend stocks on some kind of comparable basis with faster growing non-dividend stocks, he would use the P/E ratio divided by the sum of the earnings growth rate and the yield. In the case of country funds, the P/E is not always available, and cash flow is probably more consistently defined than profits [due to variances in income recognition rules, depreciation rates, and other accounting rules]. Therefore, we replace Lynch's modified PEG ratio with our PCF/(CFG + Y) ratio [price-t0-cash flow divided by the sum of the cash flow growth rate and the yield].

With those three ranks in hand, we found the list of country ETFs that are in the top half of the rank for each of the three metrics, and those that are in the bottom half of the rank for each metric.

If this combined ranking system makes sense (and the IF is up to you to decide), then the ETFs for Poland, Hong Kong, Italy and The Netherlands present the greatest opportunity, while Switzerland, Chile, Peru, Turkey and the Philippines present the least opportunity at this time.

The US which is leading the world among large markets, ranked as a low potential market by this method.

Obviously, there is no thematic, macroeconomic or other non-quantitative element in this treatment. Pure quant types may be OK with that, and many others would be incredulous. At this point it's just data - data that you may find thought provoking.

The implied action is fairly counter intuitive, and perhaps totally wrong, but interesting to consider further.

When we put P/B, Yield and a cash flow and yield modified PEG together we get the list below.

The stock ranks in green are in the top half fore the particular metric, and the stock ranks in pink are in the bottom half for the metric.

Here are two charts. One plots the percentage performance of the green shaded "cheapest" country ETFs versus the S&P 500 (proxy SPY), and the other plots the pink shaded "most expensive" ETFs against the S&P 500.

"Cheapest" (green)

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"Most Expensive" (pink)

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Disclosure: QVM has positions in SPY as of the creation date of this article (August 23, 2012).

General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.

Source: Dividend Yields An Important Factor In Country ETF Selection