Tap Into Emerging Market Dividends

By Aaron Levitt | March 02, 2011 AAA

With inflation concerns rising in China and tensions flaring in the Middle East, many investors are once again thinking about their risk profiles. Many have shifted their focus away from the high-growth/higher risk regions of the emerging markets in favor of the relative safety of the developed worlds. Funds like iShares S&P Global Consumer Discretionary (NYSE:RXI) have become popular investment destinations for investors looking to gain exposure to the developing world while staying grounded. However, the long term picture for emerging markets is still good and investors ignoring them directly are missing out. Luckily, there still is a way to play them and stay safe.

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The Secret is Dividends
When investors tend to think of emerging markets, capital gains by and large are at the top of their lists. In the past, it was rare to find a dividend paying stocks located in emerging markets. But as these markets have grown and developed, dividend paying companies have become much more prevalent. Foreign firms have traditionally held a more dividend-friendly culture, paying them to shareholders rather than keeping them as retained earnings. This is holding true in the emerging market sector as well.

Capital appreciation tends to move around pretty aggressively, but dividends are generally more predictable and are a sign of corporate health. Dividends also help lessen downward movements in stocks and help boost upside in the markets rallies. Reinvesting dividends rather than taking them as cash enhances overall returns. In terms of emerging market dividend payers, these payments can help cushion the extra volatile nature of their home markets, adding a level of protection often missing from investments in the regions.

Investors looking at emerging market dividend payers may have another reason to smile. While the U.S. dollar has been on a tear lately, the expected long-term decline in the greenback makes international dividends that much sweeter. As these dividends are paid in Bhatt, Yuan, Rubbles and Rupees, and then translated into dollars, investors can receive a higher payout as the dollar falls. Portfolios are able to enter into a quasi "currency arbitrage" transaction. By selecting stocks of nations that have good long-term prospects, such as China, and are appreciating versus the greenback, investors can increase their dividends exponentially over the longer term.

Where to Look
Investors looking to add emerging market dividends to a portfolio do have some choices. Just as the iShares Dow Jones Select Dividend Index (NYSE:DVY) offers a broad-swath of domestic high yielders, the WisdomTree Emerging Markets Equity Income (NYSE:DEM) provides the same for the emerging world. The fund follows nearly 280 different emerging market dividend payers and yields a healthy 2.65%. The fund has also managed to outperform 99% of other ETFs and active managers in the emerging market category since its inception in 2007. WisdomTree also offers the WisdomTree Emerging Markets Small Cap Dividend (NYSE:DGS). For investors wanting individual choices here are some picks.

Controlling nearly 13% of the Brazilian power market, CPFL Energia S.A. (NYSE:CPL) is one of the top yielding electric companies, foreign or domestic, and currently pays a very healthy 7.3% dividend. With a market cap of nearly $13 billion, CPFL will be one of the major beneficiaries of Brazil's increasing power needs.

The Philippines
As a member of the Next 11 class of nations, the Philippines has a high potential of becoming a global economic powerhouse in the next few years. Philippine Long Distance Telephone (NYSE:PHI) controls more than 50% of the wireless market in the nation as well as almost 100% grip on landlines. Shares of the telecomm yield 7%.

Finally, as a play on China's growing middle class, China Nepstar Chain Drugstore (NYSE:NPD) is a purveyor of both traditional and modern medicine and operates a chain of 2,500 retail outlets throughout mainland China. Shares of the company yield 5.80%.

Bottom Line
With various concerns creeping up in the emerging world, investors are once again reducing their risk and exposure to these areas. So developed market funds are becoming popular again. However, long term investors shouldn't ignore the emerging world. Safety can be had by adding emerging market stocks that pay high quality dividends the proceeding stocks as well as the new SPDR S&P Emerging Markets Dividend (Nasdaq:EDIV) are great ways to stay invested in those regions. (For related reading, see What Is An Emerging Market Economy?)

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