Think Emerging Markets Are Too Risky? Try These...
I’m sure you’ve read it before…
The IMF estimates that by 2014, somewhere in the neighborhood of 60% to 70% of the world's GDP growth will be coming from emerging markets. These aren’t your father’s emerging markets anymore. EMs have become more economically sound with their own domestic demand and earnings growth.
I’m here to tell you that if you still have a bias towards the developed world, then the growth and the development of the rest of the world will undoubtedly pass you by. But below I’ll show you how to capture some of that growth in a relatively safe way…
As I and many other writers from Investment U have told you over the past few years, there’s no use in dealing with the headache of trying to time the market. It especially doesn’t make sense now with the current unpredictable ebbs and flows of the market.
Instead, stick with trusted strategies that reduce risk while gaining the best possible return. One of these time-tested strategies, advocated by Investment U’s own Marc Lichtenfeld, is investing in quality dividend stocks.
So without further ado, let’s take a look at dividend-paying equities in emerging markets.
A “New World” of Opportunity for Dividends
As I said earlier, the IMF expects up to 70% of the world’s GDP growth to come from emerging markets. But possibly even more impressive is the fact that about 40% will come from China and India alone.
And yes, these emerging market stocks have performed well. But what you probably didn’t know is that many companies in the emerging market world have also been increasing their cash payouts.
In fact, the average dividend yield in emerging market countries is now over 3%. If you look at all of the S&P 500, the average is a little over 2%.
There’s no reason to believe that this is a passing fad. Companies are now beginning to mature around the world. And after that initial growth stage has passed, it’s time for companies to take their cash and give it to the investor rather than just re-investing it in the company.
And sometimes, the law can actually be your friend. Some emerging market companies are actually forced to pay hefty dividends. Brazilian companies are required by law to pay out at least 25% of their net profits.
The Easiest Ways to Gain Exposure
Be aware that many of the better-paying companies won’t be listed on U.S. exchanges, so you’ll probably want to gain exposure (and valuable diversification) by buying a fund. Here are some to get you started:
- Wisdom Tree Emerging Markets Equity Income Fund (NYSE: DEM) is a favorite of Investment U’s emerging market expert Carl Delfeld. It’s a broad array of the highest dividend-paying emerging market stocks. If you’re investing or thinking about investing in dividend-payers, you have to keep this a long-term strategy, because that will be the most beneficial play. Because they tend to be less volatile than non-payers, they tend to lag in a bull market, but hold up better when markets falter, says Howard Silverblatt, the Senior Index Analyst at Standard & Poor’s. “Basically, the dividend acts as an anchor holding the stock in place,” he says. And this fund follows suit.
- PowerShares International Dividend Achievers (NYSE: PID). In order to get into this portfolio, companies must be an international stock with a stellar dividend growth record… at least five consecutive years of dividend increases.
- WisdomTree Emerging Markets SmallCap Dividend Fund (NYSE: DGS) tracks the WisdomTree Emerging Markets SmallCap Dividend Index, which is made up of - you guessed it – small-cap stocks. The fund currently manages about $917 million and trades about 168,000 shares per day. The ETF charges an expense ratio of 63 basis points annually and is up 5.81% for the year. Along with capital appreciation, the current dividend yield is 3.9%.
- SPDR S&P Emerging Markets Dividend ETF (NYSE: EDIV) tracks the S&P Emerging Markets Dividend Opportunities Index, which consists of dividend-paying securities of 100 publicly traded companies in emerging markets. The ETF was launched in February last year and now has about $280 million in assets. The expense ratio for this fund is 0.59% and it’s down 5.39% year-to-date. But the current dividend yield is at 4.95%.
If you’d like to get your hands dirty in emerging marketing investing – by investing directly in the equity - and don’t like the mutual fund approach, you should definitely do it in a taxable account.
Many of these countries will levy 20% of withholding on the dividends paid to U.S. investors before you can get your hands on it. However, if it’s in a taxable account, you may be able to offset withholding against your payable U.S. taxes.
This wouldn’t be able to happen in a tax-free retirement account because of the tax laws that apply to those accounts.