Finding Yield In Emerging Markets

By Matthew McCall | November 15, 2010 AAA

The emerging market stocks have been the hot commodity amongst equity investors in 2010, as money has found its way back to the growth regions of the world. The MSCI Emerging Markets Index is up 12.5% versus a gain of 9% for the S&P 500.
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Because investors have realized that consistent big gains in stocks may no longer be the norm, they are also seeking high dividend yields. So why not put the two together: emerging market and high yields?

This has led me to search out emerging market stocks that offer growth as well as above-average dividend yields. Surprisingly there are more stocks that fall into this category than most would realize. And they are listed below.

All Encompassing ETF
The WisdomTree Emerging Markets High-Yielding Equity ETF (NYSE:DEM) is a one-stop option for investors that are seeking emerging growth exposure combined with a solid dividend yield. Since the ETFs inception in July 2007, DEM has outperformed 99% of all emerging market funds. The ETF is up 19% in 2010 and currently has a distribution yield of 4.4%. (For more, see A Dose Of International Dividends.)

The country makeup is heavily weighted towards Brazil (19%) and Taiwan (18%), but there is also exposure to Turkey, South Africa and Israel. When looking for high dividend paying stocks there are two sectors that typically offer the best yield - telecoms and financials. The two sectors make up 45% of the allocation of DEM.

DEM is a great choice for investors who do not want to take on company-specific risk. (For more, see Going International.)

Three Stocks
An easy way for investors to discover new stock ideas is to look at the top holdings of an ETF you like as an investment. I did just that with DEM and came up with three stock ideas.

The number two holding of DEM is Taiwan Semiconductor (NYSE:TSM), a large semiconductor company that supplies chips to numerous sectors around the globe. TSM currently pays a 3.3% dividend and trades at a reasonable forward P/E ratio of 11.8 and a PEG ratio of 0.75. Fundamentally TSM is attractive, but if the entire chip sector slows, TSM will fall with the masses. This is a high-risk play in the current environment.

Ambev (NYSE:ABV), based in Brazil, is one of the largest brewers in South America and is known for its Skol, Brahma and Antarctica brands of beers. The company also has a deal with Anheuser-Busch Inbev (NYSE:BUD) to distribute Budweiser products in Canada. The current dividend is 2.1% and the stock is sitting just below an all-time high after rallying nearly 40% in 2010. The forward P/E ratio is 18.2 and the PEG ratio is 1.65. ABV is clearly a leader in its sector, but must pullback more to make it a more attractive buying situation. (For more, see Beeronomics: Factors Affecting Your Pint.)

Chunghwa Telecom (NYSE:CHT) is another Taiwanese company that provides a variety of telecom and internet services throughout the country. The stock has had a solid 2010, gaining 35% and offering a 4.0% dividend yield. The forward P/E is only 16.3 even after the rally, but the PEG ratio is an abnormally high 7.3 based on lower growth estimates. If the stock pulls back to the low $20's it could be considered a buy again.

Bottom Line
The astute investor can continue to comb through the holdings of DEM and pick out a few stocks to build their own small ETF. However, most investors are better off with simply buying DEM and taking away the extra risk and time involved with individual stocks. (For more, see 4 ETF Strategies For A Down Market.)

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